BAML Debt Limit FAQ - Late Spring 2023 Update

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US Rates Viewpoint
Debt limit FAQ: late spring 2023 update
16 May 2023
Debt limit FAQ
Clients have questions on the debt limit and impact on markets. The debt limit caps Rates Research
outstanding US federal debt, currently at $31.38tn. The debt limit was last increased United States
$2.5tn in December 2021 and hit that limit on January 19th ’23. This has forced Treasury
to enter a debt issuance suspension period (DISP) where they are limited to their Table of Contents
remaining cash balance and extraordinary measures (EM) to meet their outlays. We
Debt limit 101 2
estimate EM allowed approximately $340bn of additional net debt issuance through June
What is the debt limit? 2
1. Treasury can still issue to replace maturing debt in addition to headroom from EM.
Are the debt limit & federal budget or
2
Debt limit base case continuing resolution the same thing?
Is the debt limit the same as a government
The US Treasury recently updated its debt limit forecast, stating they may run out of
shutdown and what are the economic effects of 3
cash to meet their outlays as early as June 1. We recently updated our projection for this
so-called “X-date”, which now aligns with Treasury’s estimate, due to (1) lower tax each?
receipts (2) higher projected deficit and (3) lower EM. Where are we in the debt limit process? 5
Debt limit specifics 6
Our baseline is the debt limit will be resolved prior to a technical default. However, the When is the debt limit X-date? 6
current US political polarization risks a resolution only occurring at the last minute, likely How will the debt limit be resolved? 7
after an adverse market reaction. Risks are high for a potential breaching of the X-date. Increase the debt limit via a specific dollar value
10
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Market reaction or suspend the limit until a particular date?

Debt limit unthinkable events 11
Short term funding markets will likely be most sensitive to debt limit discussions. The
What happens if the debt limit is not raised or
UST bill curve already has a pronounced hump around the June 1 X-date & US CDS have 11
suspended?
reached or are close to historic wide levels. Closer to the Treasury’s forecasted X-date of
Is the US sovereign rating at risk? 12
June 1 we will likely see broader market reaction. Our econ team discusses potential Fed
What are the implications of a US downgrade
responses in Debt limit standoff: The Fed cannot solve every problem 12
on fixed income indices?
Once the debt limit is resolved, we expect Treasury to Debt limit market impact 13
issue a large amount of bills to help rebuild their depleted How concerned is market & what will impact
13
be?
cash balance. This bill supply will likely lead to bill What has been the impact on financial markets? 14
cheapening & see a sharp reduction in the Fed’s overnight Life after the debt limit is resolved 17
reverse repo facility (ON RRP). We expect investors will What happens when the debt limit standoff is
17
resolved?
shift into higher yielding alternatives as they digest the Appendix 20
large bill supply Research Analysts 25
Mark Cabana, CFA

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Stephen Juneau
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Refer to important disclosures on page 23 to 25. Analyst Certification on page 22. 12560206 BofAS
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.
In this note, we address the following topics:
• Debt limit 101
• Debt limit specifics
• Debt limit unthinkable events
• Debt limit market impact
• Life after the debt limit is resolved
2 US Rates Viewpoint | 16 May 2023

Debt limit 101
What is the debt limit?
The debt limit, decided by Congress, sets the maximum amount of debt Treasury can
have outstanding to the public and other federal agencies. The debt limit has been
modified nearly 100 times since it was first enacted in 1917.
When government spending exceeds revenue from taxes, Treasury must issue debt to
meet that difference. Although the government has already agreed on spending, the
debt, which is necessary to pay for that spending, is voted on separately. Raising the
debt limit does not authorize future spending but rather funds existing spending. A
failure to increase the debt limit would mean Treasury is unable to pay for the spending
Congress has previously agreed to.
Congress can modify the debt ceiling either by (1) increasing the debt limit by a
particular dollar amount or (2) suspend the debt limit to a particular date. We discuss the
important differences between the two options in more detail in increase the debt limit
by a specific dollar value or temporary suspension?.
Lawmakers have suspended the debt limit seven times since February 2013 when they
first suspended the limit rather than increasing the limit by a specific amount. The last
suspension ended on July 31, 2021. More recently, in December 2021, lawmakers raised
the debt limit by $2.5t, returning to increasing the debt limit by a specific dollar amount.
Exhibit 1: US debt subject to the debt limit ($tn)
The Treasury has modified the DL nearly 100x since 1917, including 6 suspensions
35
Suspension Period
30 Debt Subject to the Limit
Debt Limit
25
20
15
10
5
2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 2023
Source: BofA Global Research, US Treasury
BofA GLOBAL RESEARCH
Once the government hits the debt limit and exhausts all available extraordinary
measures, the US could become unable to pay all of its obligations including debt
payments, social security, healthcare, government salaries and contractor bills.
While we still expect the debt limit will be increased before we reach the X-date we
acknowledge greater risks around passing the X-date without a resolution due to the
current US political polarization. Crossing the X-date means the government must
immediately balance its books on a day-to-day basis, which could mean cutting
government outlays considerably & result in a temporary economic contraction.
We discuss risks around crossing the X-date in debt limit unthinkable events.
Are the debt limit & federal budget or continuing

resolution the same thing?
No. Simply, the debt limit is an agreed amount of borrowing Treasury can issue to meet
any gaps between tax revenue and government spending. The federal budget /
continuing resolutions are an agreed amount of government spending.
US Rates Viewpoint | 16 May 2023 3

An appropriations bill is a law passed at the start of each fiscal year that provides
spending approval or appropriations to government agencies and all parts of the
government. Continuing resolutions are a stripped down form of an appropriations bill
that provide temporary funding measures that Congress can use to fund the federal
government for a limited amount of time until they agree on a larger appropriations bill.
Congress passed a large $1.7tn appropriations bill on December 23rd ‘22 after a
continuing resolution was passed on September 30th ’22 and another on December 16th
’22. In passing these continuing resolutions, the government avoided a government
shutdown while they ironed out details on the larger appropriations bill.
Debt limit increases are often coupled with federal budgets or continuing resolutions.
However, these pieces of legislation are separate and distinct. There have been
discussions recently by GOP lawmakers to push a debt limit deadline to September 30th
to line it up with the timing of an appropriations bill. We discuss this in detail below.
An appropriations bill approves government spending while the debt limit which caps
debt needed to pay for the spending that Congress has already approved.
Is the debt limit the same as a government shutdown and

what are the economic effects of each?
The debt limit and a government shutdown are different, but both affect the ability of
the federal government to function. A government shutdown occurs when Congress fails
to pass appropriations legislation for a federal budget or a continuing resolution. This
means existing appropriations and non-essential government functions must stop.
The economic impact of a government shutdown is more limited than failing to increase
the debt limit. Shutdowns result in a temporary furlough of non-essential government
workers, who typically receive back pay after a shutdown is resolved. A failure to
increase the debt limit could result in broad based financial market dislocations & would
see the government temporarily run a balanced budget / sharply tighten fiscal policy.
Our US economists estimate the economic effects of federal government shutdowns as
modest - at about 0.1pp of GDP growth per week the government is shut down. In the
national accounts, the main effect on GDP of a shutdown arises through reduced
compensation of federal employees deemed non-essential (about 38% of the 2.1mn
non-postal federal employees during the most recent shutdown). There are also
secondary effects from reduced government spending on goods and services.
Exhibit 2: Revenue and outlays of the federal government ($bn) Exhibit 3: Fiscal Year 2022 share of Federal Government outlays
Revenues and outlays are lumpy. The federal government regularly finances Entitlement programs like social security and Medicare make up roughly a
monthly deficits through debt issuance third of government spending
2015-2019 (avg.) 2020-2022 (avg.)
Net Revenue Net Outlays Net Revenue Net Outlays Social security 19%
Jan 333 304 407 433 Health 15%
Feb 161 366 242 496
Mar 224 362 273 597 Income security 14%
Apr 482 318 515 733 National Defense 12%
May 225 341 342 541 Medicare 12%
Jun 332 356 384 759 Education, training, employment… 11%
Jul 229 329 365 557 Net interest 8%
Aug 223 362 265 462
Sep 358 291 440 647 Veterans Benefits and services 4%
Oct 233 329 280 459 Transportation 2%
Nov 209 359 251 446 General Government 2%
Dec 329 347 429 513 Other 1%
Source: US Treasury Department, BofA Global Research
BofA GLOBAL RESEARCH 0% 5% 10% 15% 20% 25%
Source: US Office of Management and Budget, BofA Global Research


Depending on the timing of any shutdown, much of the lost activity can be made up in
the current or subsequent quarter, though spending on services cannot be inventoried
and may result in a permanent loss. On net, federal government shutdowns bring limited
economic fallout so long as they do not extend past several weeks, which may explain
why they have been incurred regularly as part of fiscal negotiations in recent decades. In
addition, shutdown risk is not likely to emerge soon, since the government is funded
through the current fiscal year (for more detail see Return of fiscal brinkmanship).
A violation of the debt limit, or a government default, meanwhile, constrains the

government’s ability to pay all its obligations to both creditors and other expected
recipients. The direct effect on economic activity from a government default is a
function of timing, duration, and prioritization.
A default forces the Treasury to run a balanced budget for the duration of the default.
Since revenue and outlays are seasonal, the timing of a government default is critical to
determining the direct effect on economic activity from any potential default. A default
in June, for example, would likely result in fewer reductions in outlays due to corporate
tax collections than a default in July or August (Exhibit 2).
Duration also plays a role, a short-lived default (e.g. one week or less), would mean the
Treasury is only running a balanced budget for a short period of time. Also, many of the
missed payments are likely to be made up following any resolution. Therefore, the direct
effect from a brief default would likely be difficult to see in the economic data. However,
the longer the default lasts, the more adverse the shock is to economic activity.
Whether or not Treasury decides to prioritize payments is also key for determining the
direct effect of a default on economic activity. Should Treasury choose to prioritize
interest payments to guard against downside risks to financial markets, then it will be
forced to make more significant cuts to spending elsewhere.
In 2022, interest payments accounted eight percent of total outlays (Exhibit 3).
Moreover, interest payments have continued to climb this year due to higher rates.
Therefore, prioritizing interest payments would lead to larger cuts to programs like
social security, income security and Medicare which could affect consumption due to
lost income.
Importantly, the direct effect is likely to be similar to a government shutdown in the

event of a short default. That said, a default is likely to have severe, though uncertain,
financial market and indirect effects that would dwarf the direct effects and add
downside risks to our economic outlook.
Exhibit 4: S&P 500 Exhibit 5: Consumer and business sentiment (Aug 2011 = 100)
The 2011 fight over the debt ceiling led to a sharp drop in stock prices Sentiment for consumers and businesses fell during the debt limit episode
1450 190 115
S&P 500 Aug 2. Budget control Consumer confidence
act passed
180 Consumer sentiment
170 NFIB small business optimism (rhs) 110
160
1300
150
140 105
130
1150 120
100
110
100
1000 90 95
Feb-11 May-11 Aug-11 Nov-11 Feb-12 Jan-2011 Apr-2011 Jul-2011 Oct-2011 Jan-2012 Apr-2012
Source: Bloomberg, BofA Global Research Source: Conference Board, University of Michigan, National Federation of Independent
BofA GLOBAL RESEARCH Businesses (NFIB), Haver Analytics, BofA Global Research

To gauge these effects, we look at developments in financial markets and sentiment
measures around the 2011 debt limit crisis. Equity prices declined ahead of Congress
singing the Budget Control Act of 2011 into law on August 2 by close to 8% (Exhibit 4).
Volatility also spiked and mortgage and credit spreads widened. Similarly, confidence for
businesses and consumers fell ahead of the resolution. (For more information, see: What
has been the impact on financial markets?)
We think this provides a good starting point, but likely understates the financial and
sentiment response of any actual government default no matter how short lived.
Adverse shocks to both financial markets and sentiment would likely lead to significant
pullbacks in investment and consumption that could easily tip the economy into a
recession.
Indeed, analyses of the potential economic fallout from a default from the Federal
Reserve in 2013 and the Council of Economic Advisors in 2023, both find a default
would be a significant adverse shock for the economy. The 2013 analysis from the Fed
estimated that a default that lasted a few weeks would trim 1.3ppt from growth in the
immediate year of the default and 1.7ppts in the following year. Moreover, the Fed
estimated that the unemployment rate would remain above its baseline projections over
the long run (Exhibit 6).
Meanwhile, the Council of Economic Advisors recently estimated the effects of a
protracted default, a short default and a period of brinkmanship. They found that a
protracted default could drive the unemployment rate up by five percentage points in 3Q
2023, while a short default would push the unemployment rate up by 0.3 percent (Exhibit
7)
We think these estimates are good guideposts of the potential economic consequences
from a government default. Though admittedly the error bands around these estimates
are likely wide given the lack of a true historic analogy and numerous unknowns.
Nevertheless, what is undisputable is that a government default poses a downside risk
to our current forecast for a mild recession.
Exhibit 6: Simulated Macroeconomics Effects of a Temporary Federal Exhibit 7: CEA estimate economic effects of Debt ceiling standoff: 3Q
Debt Default by the Federal Reserve in 2013 (change from baseline 2023
ppt) The CEA estimates that even brinkmanship around the debt ceiling would be
An analysis by the Fed in 2013 found that a debt default would lead to a drag on growth and create job losses
weaker GDP growth, elevated unemployment and lower inflation vs. its
Protracted
baseline.
Brinkmanship Short default default
2013 2014 2015 2016 2017 Jobs, millions -0.2 -0.5 -8.3
Real GDP (Q4/Q4 % ch.) -1.3 -1.7 -0.5 0.4 1.2
Unemployment rate Real GDP % -0.3 -0.6 -6.1
0.2 1.3 1.7 1.5 0.8 annualized growth
(Q4 level)
Core PCE (Q4/Q4 % ch.) 0 0 -0.2 -0.3 -0.4 Unemployment,
0.1 0.3 5.0
percentage points
Source: “Possible Macroeconomic Effects of a Temporary Federal Debt Default”, Engen E.,
Source: CEA
Follette G., Lafort J., October 4 2013
Where are we in the debt limit process?

Treasury hit the $31.38tn debt limit on January 19th . This triggers a debt issuance
suspension period (DISP) where Treasury cannot issue debt that would bring them above
that limit. The Treasury now has to use its cash balance and extraordinary measures to
meet its obligations on a temporary basis (Exhibit 8).
Extraordinary measures (EM) are inter-governmental accounting maneuvers that allow

Treasury to issue a limited amount of marketable debt to the public for a short time
without going over the debt limit. In other words, it helps to add headroom under the
debt limit that can otherwise be used to issue marketable debt and meet existing outlays
or refill some of their cash balance. The largest EM accounting maneuver essentially

sees the US Treasury issue an “IOU” to an inter-governmental retirement fund in
exchange for the USTs held by the fund. These USTs can then be issued to the public.
Exhibit 8: Extraordinary Measures as of May 10 ($b)

This excludes the $8.3b from the CSRDF/PSRHBF at the start of each month and the $145.5b on June 30
Measures
Impacted Funds Authorized Measures Used Measures Remaining
CSRDF/PSRHBF 21 -21 0
G Fund 295 -223 72
ESF 17 0 17
Totals 333 -244 88
Source: US Treasury
The period of time that extraordinary measures may last is subject to considerable
uncertainty due to a variety of factors, including the challenge of forecasting the
payments and receipts of the U.S. government. Secretary Yellen has projected that the
US Treasury will have used up its extraordinary measures and cash balance by June 1st,
their projected X-date, and will be unable to fund all of its obligations. BofA recently
updated our projected X-date which now aligns with the Treasury’s forecast. We discuss
this in more detail in: When is the debt limit X-date?
The next step is for Congress to agree on a debt limit resolution before the X-date.
Debt limit specifics

When is the debt limit X-date?
Secretary Yellen has stated the Treasury will run out of cash to pay all of its obligations
by June 1. This is called the X-date. It means that once past this date, the Treasury will
no longer be able to pay all of its expenses without issuing more debt.
We recently revised forward our X-date projections which now aligns with Treasury’s
June 1 X-date. This revision was driven by (1) lower tax receipts (2) higher deficit
projections (3) lower EM remaining.
Our numbers previously implied that UST would run dangerously close to running out of
money in early June. If Treasury can make it to mid-June, when they can partially refill
the cash balance from corporate tax receipts, we believe they could make it through at
least the first week of July due to a large one-time increase in extraordinary measures of
$145b at June month-end.
We now see the balance of risk skewed towards an earlier X-date. After adjusting for
higher Treasury financing needs, which either must come from higher debt issuance or
larger withdrawals from the Treasury’s cash balance, we now believe Treasury will run
out of cash sooner than previously expected.
Due to large outflows typically seen on the first business day of June, the Treasury is
likely to run out of money on June 1 (Exhibit 9). Our base case is that the US government
would begin to miss some government payments by June 1 but will likely continue to
make interest payments on their debt.

Exhibit 9: Treasury cash balance & extraordinary measures ($bn)
The UST and BofA X-date forecast is June 1, when they run out of cash and EM
1,000
DISP starts; EM deployed
800 UST & BofA
600 X-date
400
200
-
(200)
(400)
Jan-23 Feb-23 Mar-23 Apr-23 May-23 Jun-23
How will the debt limit be resolved?

It is unclear how the debt limit will eventually be resolved. A debt limit increase this year
is complicated by divided government (Ds = White House, Senate; Rs = House). A similar
White House & Congressional composition drove some of the most contentious debt
limit standoffs in the past, especially in 2011 (Ds = White House, Senate; Rs = House).
We think that any resolution of the debt ceiling will come at the last minute and there is
a significant risk that the ceiling is briefly violated and some payments are missed. As
long as there is no significant political or other cost to the standoff, neither side has an
incentive to compromise. Both sides know that the outcome of this battle set a
precedent for future battles.
Hence, our economists believe that resolving the debt ceiling will require some kind of
outside pressure. That could come from the public learning how dangerous it is to
violate the ceiling and expressing their concern in public opinion polls. It could also come
from a sharp sell-off in the equity market as concerns about a default rise. The debt
market is already starting to recognize the risks. US CDS pricing is the highest ever for
this early in a debt limit standoff (Exhibit 10). For more detail on debt limit risks see
Upside to debt ceiling risk.
Exhibit 10: US CDS pricing (bps)
US CDS have spiked with increased debt limit concern
Source: Bloomberg
To increase the debt limit today the legislation must be passed in a standard manner
through both the House & Senate. The composition of Congress provides no possibility

of a reconciliation work around. The House will require a majority vote to advance the
legislation while the Senate will likely require a 60-vote majority.
Clients have recently asked a number of procedural questions related to potential debt
limit passage. The two most common: (1) does a DL bill have to start in the House? (2)
what happens if there is no House speaker? We address below.
DL bill point of origination: either the House or Senate can originate debt limit
legislation. The House has already passed a debt limit plan, but it is not expected to pass
the Senate. If the Senate were to originate and pass legislation with 70+ votes, we
expect this would place increased pressure on the House to pass (this is because the
70+ vote threshold would include a number of Republicans in support).
Implications of no House speaker: under current House rules only one member of
Congress — Democrat or Republican — is needed to bring a "motion to vacate," which
forces a vote on removing the speaker. If the speaker is removed it could materially slow
down legislative progress & could delay House business until a new speaker is chosen.
The most likely outcome is a bi-partisan deal to increase the debt limit but there are
some non-standard steps that could be taken. We review some of these non-standard
steps below, including parliamentary maneuvers & other more legally contentious steps:
Small increase or temporary suspension: It is possible that if the government cannot

agree on a debt limit resolution prior to the X-date that they pass a small resolution to
kick the can down the road until they can agree on a larger resolution. Congress last did
this in October 2021, when they increased the debt limit by $480b, which only pushed
the X-date back two months, but this gave them enough time to agree on a much larger
resolution. This has also typically led to a reset of extraordinary measures, which
Treasury refills when the DL is increased but can spend again once the new limit is hit.
We have already heard media chatter considering this scenario. Media reports suggest
some Republicans would like to tie the debt limit to government spending. Republicans
could therefore force a temporary resolution to kick the debt limit to September 30th . In
this scenario, Republicans would likely want to tie a debt limit resolution to an
appropriations bill to cut government spending. Democrats may be resistant to this
scenario since it would tie the debt limit more clearly to spending cuts. However, if the
debt ceiling goes down to the wire, there may have no other choice.
A temporary debt limit push to Sept 30 matters for 2 reasons: (1) a likely near-term bill
supply (2) decreased odds of a very bad debt limit outcome.
Bill supply: To forecast bill supply based on this risk scenario, we assume a May 31
short-term resolution, TGA quickly ramping up to $500b over the summer, before falling
back to ~$70b by Sept month-end to align with the assumed TGA level when the
resolution was passed. Based on this, we see the X-date pushing back to Feb ‘24.
This temporary resolution would result in $50b more bill supply over Q2, but $450b
lower than our base case over FY'23 (Exhibit 11). The lower relative bill supply forecast
from Sept '23 – Feb '24 will likely result in less cheapening in bills vs OIS, a weaker drop
in ON RRP, and less cheapening in broader money market rates.
We assume the TGA will have to return to the level it was at when the temporary debt
limit resolution was passed, which we currently estimate will be around $70b on May
month-end.

Exhibit 11: Bill supply forecasts under different scenarios ($b)
A short-term resolution may initially lead to higher bill supply but likely to result in less bill supply over the FY
2,500 June resolution Short term-resolution to Sept 30
2,000
1,500
1,000
500
(500)
Jan-22 Apr-22 Jul-22 Oct-22 Jan-23 Apr-23 Jul-23 Oct-23 Jan-24
Source: BofA Global Research, Treasury
Lower odds of bad outcome: bad outcome odds drop b/c (a) X-date is likely pushed to
Feb ’24 with replenishment of extraordinary measures (b) a lapse in appropriations
spending after Sept 30 would shut down the government & tie more closely gov’t
opening + debt limit. This could pull forward a spending fight that would likely be
resolved well before the X-date. For context, the longest government shutdown in US
history was 34 days (’18-’19). It would require a government shutdown that is likely 4-5x
the longest in history to risk breaching a Feb ’24 X-date. Importantly, we assume that a
resolution to the gov’t shutdown + debt limit are achieved at the same time.
Discharge petition: this is a parliamentary maneuver that would allow a majority of the
House to advance legislation that the House Speaker has otherwise ignored. Here is how
the petition works, according to Indivisible.org:
After a bill has been introduced and referred to a standing committee for 30 days, a
member of the House can file a motion to have the bill discharged, or released, from
consideration by the committee. In order to do this, a majority of the House (218 voting
members, not delegates) must sign the petition. Once a discharge petition reaches 218
members, after several legislative days, the House considers the motion to discharge the
legislation and takes a vote after 20 minutes of debate. If the vote passes (by all those who
signed the petition in the first place), then the House will take up the measure.
This maneuver would require some House Republicans to defect from the leadership to
support a debt limit increase. Our reading of Congressional reporting suggests the odds
of a successful discharge petition are quite low but remain a non-zero probability.
Ignore the debt limit: if no legislative solution can be found some Constitutional
scholars have argued for invoking the 14th Amendment to prevent default. The 14th
Amendment is primarily intended to grant citizenship to most individuals born or
naturalized in the US but has a notable clause in section 4. Section 4 states “the validity
of the public debt of the United States…shall not be questioned”. In essence, these
Constitutional scholars argue that the 14th Amendment renders the debt limit illegal.
It is possible that in the event of no resolution the President could instruct to the
Treasury Secretary to ignore the debt limit & continue paying government obligations /
issuing additional debt citing the 14th Amendment. Any such action would almost
certainly face swift legal challenges. We are not legal experts but are unaware of any
material Constitutional challenge against the debt limit using the 14th Amendment.
Ignoring the debt limit & invoking the 14th Amendment would likely only be pursued in an
extreme scenario. We have no strong sense of the potential success for such a legal
challenge; the fact it has not been employed in the past suggests reasonably long odds.

Mint a $1tn platinum coin: another untested option includes the idea of minting a $1
trillion or other very large denomination platinum coin. The idea would involve the US
Treasury minting a $1 trillion platinum coin that the US government could use to pay
their obligations. The Treasury would deposit the coin at the Federal Reserve, crediting
their account for the coin’s full face value. The coin and the proceeds it generated would
not be counted as debt subject to the debt ceiling rule. The Treasury Secretary would
then direct the Fed to transfer the funds to the Treasury General Account (TGA), at
which point the money could be used to cover outlays. This exercise would result in a
$1tn increase in the Fed balance sheet.
This maneuver has never been tried before and has questionable legal grounds but is
another potential way around the debt limit. The potential legal justification for this
action can be found in the United States Code. The US Code “is the codification by
subject matter of the general and permanent laws of the United States.” 1 The provision
can be found in U.S. code, title 31, subtitle IV, chapter 51, subchapter II and specifies
“denominations, specifications, and design of coins”. Language in this section states
that “the Secretary may mint and issue platinum bullion coins and proof platinum coins in
accordance with such specifications, designs, varieties, quantities, denominations, and
inscriptions as the Secretary, in the Secretary’s discretion, may prescribe from time to
time.” The Treasury Secretary discretion is what allows for the possible minting of a
large value platinum coin. We cannot opine on legal grounds for such action but it is a
potential action that could work as a last line of defense against a technical default.
Treasury Secretary Yellen has called this maneuver a “gimmick” in late Jan ’23, which
reduces the odds this administration will pursue the option.
Increase the debt limit via a specific dollar value or

suspend the limit until a particular date?
Congress passed debt limits with a specific dollar value until February 2013. This
practice was adopted after UST debt outstanding exploded following the 2008 financial
crisis when it became more difficult to forecast.
Since 2013 and until 2021, Congress suspended the debt limit until a future date (usually
several months after a mid-term or Presidential election). The level of debt on the date
the suspension expires becomes the new debt limit and Treasury immediately becomes
constrained by this limit. This reduces the uncertainty around the timing of debt limit
episodes and insures they are not close to election dates.
Congress reverted to increasing the debt limit by a specific dollar amount in December
2021. Republicans claimed they wanted to hold Democrats accountable for a specific
dollar amount of debt. The issue with increasing the debt limit by a dollar amount is that
there is significantly more uncertainty regarding when the debt limit will next hit, which
we experienced in January.
In increasing the debt limit by a particular amount, the day Treasury will next hit the debt
limit is therefore dependent on Treasury’s difficult to predict income and outlays. As we
saw this last December, Treasury can temporarily delay hitting the debt limit by cutting
bill supply and using up their cash balance. In January, Treasury reversed course once
their cash balance was approaching $300b; Treasury increased bill supply to grow their
cash balance, finally hitting the debt limit.
In either scenario, Treasury still has some time between initially hitting the debt limit
and the X-date due to what remains in their cash balance and extraordinary measures.
What is important to distinguish is suspending the debt limit removes one layer of
uncertainty by providing the exact timing of when Treasury will hit the debt limit.
1
See “United States Code”, United States Code | govinfo

Debt limit unthinkable events
What happens if the debt limit is not raised or suspended?
If we reach the X-date and the debt limit is not extended, the US Treasury would run out
of money to pay all of its obligations. This would force Treasury to default to either its
debtors or other federal payment recipients. We believe that ratings agencies would only
consider the US “in default” if it missed an interest payment on its debt.
Congress has never allowed for this situation to come to pass but due to previous debt
limit episodes, the market knows a bit about what such a scenario might look like. Prior
debt limit episodes have shed light on: (1) ability to prioritize UST debt payments; (2)
possibility of delaying UST payments; (3) potential Fed actions.
UST debt payments prioritization ability: during the 2011 and 2013 debt limit
episodes, the public transcripts from the surrounding FOMC conference calls suggest
the US government has the technical ability to prioritize UST debt payments. The Fed
presenter suggests two key principles around a debt limit impasse: (1) UST principal &
interest payments would continue to be made on time; (2) Treasury can decide every day
whether to make or delay other government payments.
Based on these comments, it seems the US government has ability to prioritize UST
debt payments. However, debt or other spending prioritization has never been tested in
practice and it is possible there could be unforeseen plumbing issues with the practice.
Equally important to payment prioritization ability is political willingness. Prioritizing

UST interest payments over other obligations (eg. social security or military) could be
politically unpopular. However, missing debt payments could have more disastrous
economic impacts. We believe prioritization willingness rests solely with the US
President. However, choosing which payments to prioritize seems a “lose-lose” choice.
Social Security Clause: Our understanding is that Social Security and Medicare
obligations will not be disrupted in the event we cross beyond the X date, with or
without a prioritization plan in place. A report by economist Steve Robinson who was a
policy adviser for the Social Security Administration discusses a 1996 law (Public Law
104–121 March 29, 1996) that explicitly protects Social Security and Medicare
payments by allowing Treasury to tap their associated trust funds if needed to make
payments to recipients. While this could potentially be done in a parallel with
prioritization, we believe it would be operationally simpler to do it without a
prioritization plan in place.
Possibility of delaying UST payments: if Treasury decides not to prioritize UST

payments, it could potentially delay the payment on a bill or coupon. The Securities
Industry and Financial Markets Association (SIFMA) & the Treasury Market Practice
Group (TMPG) each created best practices in the event of a delayed UST payment after
the 2013 debt limit scare. SIFMA's documents stress the importance of early Treasury
communication to the public around an intention to delay payment for settlement &
process purposes. The TMPG document discusses logistics around how a technical
adjustment to Fedwire could roll forward the maturity date of UST securities so that
they can still be transferable and avoid being frozen on trading systems. The benefit of
continuing to make a security transferable is to promote liquidity, market making, and
allowing for potential transfer to the Fed. We believe rolling forward of maturity dates
would count as a selective default by ratings agencies.
Fed actions: The October 2013 FOMC conference call transcript also suggested a
series of steps the Fed could take to promote market functioning in the face of a debt
limit episode (Exhibit 12). There were a number of options proposed using the Fed's
existing authority or expanding it with the aim of ensuring the stability of the Treasury
market. Most of the actions discussed would involve the Fed taking potentially delayed
payment securities permanently out of the market (at their presumably discounted price)
or swapping them for non-delayed payment securities already held by the Fed.

Exhibit 12: 2013 Fed responses to debt limit market functioning issues
Fed also has standing repo facility & overnight RRP today
Existing Authority Money market strains Outrights
Outright purchases Reverse repos CUSIP swaps
Securities lending Dealer repos
Rollovers
Repos
Discount window lending
Source: BofA Global Research, Federal Reserve
The transcript offers a range of views around the willingness of the Fed to engage in
such actions back in 2013; we assume the Fed's more proactive role in responding to
2020 Treasury market dislocations might make them more willing to step in and
ameliorate debt limit market strains though it would come with moral hazard risks.
The Fed's expanded toolkit since 2013, including the overnight reverse repo facility (ON
RRP) and standing repo facility (SRF), provide more automatic stabilizers to address
market dislocations. We expect both facilities to see greater use as the X-date
approaches: money market funds would likely want to invest with the Fed at ON RRP
rather than own a potentially delayed payment UST security & dealers might seek
funding from the Fed via SRF rather than pay up to finance a delayed payment UST
security. We fully expect the Fed will not deliver delayed payment UST collateral to ON
RRP users in a debt limit standoff; only well performing USTs would likely be used as ON
RRP collateral. The SRF rate could also be lowered to limit extent of a funding spike.
See more from our Econ team in Debt limit standoff 09 May 2023
Is the US sovereign rating at risk?

Current US ratings are stable for S&P and Moody’s (Exhibit 13). The outlook is negative
for Fitch “to reflect the ongoing deterioration in the U.S. public finances and the absence of
a credible fiscal consolidation plan”. If Congress waits too long or fails to pass a debt limit
resolution by the X-date, the US sovereign credit rating may be downgraded like it was
in 2011 by S&P from AAA to AA+. While a single notch downgrade is unlikely to result in
forced selling from any major indices, a selective default or restricted default rating
could result in some forced selling from investors that are not able to hold securities
with such ratings. Our understanding is that the main index programs that are used as
benchmarks across global portfolios have adopted rule changes to remove ratings
requirements which would reduce the index-related impacts. We also believe that CME
would continue to accept as collateral Treasury securities that were experiencing
delayed payments. This would reduce margin calls in the extreme event of delayed
payments or maturities.
Exhibit 13: Current US ratings

Rating by credit agencies
Rating Outlook As Of
S&P AA+ Stable Mar-2021
Fitch AAA Negative Jul-2020
Moody’s Aaa Stable Jun-2020
Source: Fitch, Moody’s, Reuters
What are the implications of a US downgrade on fixed

income indices?
We focus on two major providers across both their Treasury & broad fixed income
indices, including: (1) BofA ICE, (2) Bloomberg / Barclays.
BofA ICE: The Treasury index (G0Q0) contains no specific ratings requirement. The broad
fixed income index (US00) explicitly exempts “local currency sovereign debt” from
ratings requirements. These rules were modified after the 2011 debt ceiling episode to
accommodate ratings volatility caused by debt ceiling negotiations.

Bloomberg / Barclays: Prior to March 2023, Treasury & aggregate fixed income indices
required that securities must be investment grade but Bloomberg announced index rule
changes in March 2023 to essentially minimize any index impact to delayed payments.
The current index rules specify that coupon payments will be treated as paid on the
coupon dates and maturities will be treated as having matured on the maturity date. As
a result, we expect no forced selling from index rules in the BofA ICE or
Bloomberg/Barclays indexes.
Debt limit market impact

How concerned is market & what will impact be?
The market is starting to show signs of concern around an X-date on June. Historically
we have seen the clearest evidence of concern through a bill market “kink” and increase
in US credit default swap (CDS) pricing.
Investors typically reflect a desire to shun potentially impacted paper, thus leading to the
bill market “kink” (Exhibit 14). Usually this coincides with cheapening of potentially
impacted UST coupon securities, which is not yet priced in.
There has already been a sharp widening of 1Y & 5Y US CDS contracts as a result of the
debt limit (Exhibit 10). US CDS contracts are denominated in euros & traded outside the
US. These contracts have limited liquidity but clearly reflect acute concerns over
potential US default. CDS levels have reached new highs in this episode, but because
the payoff on these contracts is assumed to be the 1 – price of lowest-priced UST bond,
the probability of default implied by CDS is more in line with the 2011 markets.
We are closely monitoring for any cheapening of UST coupon securities with potentially
delayed payments vs surrounding issues. To date, there has been only a very modest
impact on these securities (Exhibit 15).
Clients have also asked about the expected impact on broader US rates in the event of a
UST default. We have thought about this impact as: (1) US OIS curve (2) UST-OIS
spread. We expect that most UST yields will decline & curve bull steepen with DL stress.
US OIS curve: any technical UST default will likely see the US OIS curve bull steepen. The
US OIS curve bull steepening will be driven by financial stress & increased recession risk
with sharp fiscal tightening (e.g. delayed social security payments). The market will likely
price increased probability of Fed rate cuts or intermeeting cuts in this scenario.
Historically, rates have declined around debt limit standoffs.
UST-OIS spread: we expect material dislocations on the UST curve with any technical
UST default. Delayed payment UST securities are likely to cheapen materially vs OIS,
including short-dated bills & coupons with impacted payments. However, USTs that have
recently received coupon payments should rally (lower yield) in any scenario. We believe
investors will likely still use non-delayed payment USTs as flight to quality instruments.
Delayed payment UST securities will also likely be more difficult to fund in repo & may
end up trading as their own cheaper segment of the UST repo market. In the event of
technical UST default, we expect the Fed to use all available tools to fund these
dislocated securities (via repo, securities lending, lower discount window, outrights).
Delayed payment securities are likely to be valued in relation to where they can be
funded at the Fed. In the event of UST technical default, we expect the Fed will be
willing to accept defaulted collateral through their standing repo facility (SRF). SRF is
currently at the top of the fed funds target range or 5.25%. Dealers who facilitate the
movement of technically defaulted securities to the Fed would likely require some
compensation from clients, which we estimate at max might total 25bps. Therefore, the
upper bound for how cheap defaulted securities might trade is 5.5% (SRF = 5.25% +
dealer balance sheet cost = 25bps). We might suspect the Fed will lower the SRF rate or

increase the total repo size to promote market functioning & move the defaulted USTs
out of the market.
Exhibit 14: Treasury Bill Curve (bp) Exhibit 15: Yields of Tsys paying coupons on May 15 & June 15 (bp)
Market is now reflecting concentrated risk in bills maturing after Jun 1 X-date Spread does not currently show much change
600 550 1.00

5/15/2023 4/28/2023
550 500 -0.25
500 450 -1.50
450 400 -2.75
400 350 -4.00
Spread (RS)
350 300 T 2 3/4 05/15/25 Govt -5.25
UST X-date T 2⅞ 06/15/25 Govt
300 250 -6.50
16-May-23 6-Jun-23 27-Jun-23 18-Jul-23 May-22 Jul-22 Sep-22 Nov-22 Jan-23 Mar-23
Source: BofA Global Research, Bloomberg Source: BofA Global Research, Bloomberg
BofA GLOBAL RESEARCH BofA GLOBAL RESEARCH
What has been the impact on financial markets?

Previous debt limit episodes imply that markets don’t seem to price in debt limit
scenarios until two weeks before the projected X date. In 2011, the debt limit was not
resolved until the projected X-date, which weighed heavily on investor sentiment,
leading to lower equity prices and higher volatility (Exhibit 16, Exhibit 17). However, in
later debt limit scenarios, especially those in which the debt limit was resolved several
days or weeks before the projected X-date, the impact on risk assets was less severe.
Exhibit 16: S&P 500 around previous X-dates (% change) Exhibit 17: VIX around previous X-dates (ppt chg)
S&P performance around X-dates is mixed DL impact on vol limited outside of 2011
12% 30 2011 Average 2021

2011 Average 2021
8%
20
4%
0% 10
-4% 0
-8%
-10
-12%
T+1
T+2
T+3
T+4
T+5
T+6
T+7
T+8
T+9
T+10
T-9
T-8
T-7
T-6
T-5
T-4
T-3
T-2
T-1
T-0
T-10
T-10 T-8 T-6 T-4 T-2 T-0 T+2 T+4 T+6 T+8 T+10
The impact on the dollar appears to be modest in either scenario (Exhibit 18). Past
instances of debt ceiling related stress have not produced material or sustained FX price
action. Most notably, the USD was broadly stable/slightly higher throughout the 2011
episode, amid a large decline in US equities around S&Ps downgrade of the US credit
rating. However, this time could present more cross-currents for the USD, with a key
differentiating factor being the stance of Fed policy. In 2011, with fed funds at the
lower bound, Fed guidance pointed to “exceptionally low levels for the federal funds rate
for an extended period of time”. With fed funds now likely at or near the terminal rate of
5-5.25%, and over 75 basis points of cuts priced in for later this year, a market shock
could easily bring this (and additional) easing forward. All else equal, this would be a
headwind for the dollar, and serve as a potential/partial offset to a more traditional
“risk-off” reaction. It is likely the case where a shock scenario were to see the USD
outperform high-beta currencies, while underperforming other traditional safe havens,
such as the JPY, CHF and potentially EUR.

Exhibit 18: DXY around previous X-dates (% chg)
Debt limit impact on DXY appears mixed
1.0%
2011 Average 2021
0.5%
0.0%
-0.5%
-1.0%
-1.5%
T+1
T+2
T+3
T+4
T+5
T+6
T+7
T+8
T+9
T+10
T-9
T-8
T-7
T-6
T-5
T-4
T-3
T-2
T-1
T-0
T-10
Source: BofA Global Research, Bloomberg

Due to concerns about the fiscal outlook, one might expect upward pressure on Treasury
yields but in three out of the past seven debt limit scenarios, yields actually fell going
into the X-date (Exhibit 19). The reason for UST yield decline is likely due to worse
market & economic sentiment that would necessitate easier monetary policy. We might
expect the FF OIS curve to bull steepen amidst any acute debt limit concern today.
Pressure in short term funding markets tends to be more pronounced. In GCF repo, rates
have increased up to 20bps going into previous X-dates (Exhibit 20) primarily due to
flows out of Treasury-only MMFs. However, any spike would likely be capped at or
slightly above the Fed’s standing repo facility (SRF) rate. 1m Bills have cheapened
relative to 1m OIS in the few days prior to previous X-dates (Exhibit 21).
Exhibit 19: US 10yr yield around prior X-dates (bp chg) Exhibit 20: GCF repo around previous X-dates (bp chg)
Risk off flows likely to lead to lower yields GCF repo spiked in the week leading into ’11, ’13, ‘19 debt limits
60 40
2011 Average 2021 2019 Average 2021
40 30
20 20
0
10
-20
0
-40
-10
-60
T+1
T+2
T+3
T+4
T+5
T+6
T+7
T+8
T+9
T+10
T-9
T-8
T-7
T-6
T-5
T-4
T-3
T-2
T-1
T-0
T-10
T-10 T-8 T-6 T-4 T-2 T-0 T+2 T+4 T+6 T+8 T+10

Exhibit 21: 1mo Bill - OIS spread in prior X-dates (bp chg) Exhibit 22: Bill levels around prior X-dates (bp chg)
Bills typically cheapen to OIS ahead of projected X-dates Bills historically have shown material cheapening 10-15 days ahead of X date
15 25
2011 Average 2021 8/4/2011 Average 10/18/2021
20
10
15
5 10
5
0
-
-5 (5)
T+1
T+2
T+3
T+4
T+5
T+6
T+7
T+8
T+9
T+10
T-9
T-8
T-7
T-6
T-5
T-4
T-3
T-2
T-1
T-0
T-10
T-9
T-8
T-7
T-6
T-5
T-4
T-3
T-2
T-1
T-0
T-20
T-19
T-18
T-17
T-16
T-15
T-14
T-13
T-12
T-11
T-10
Historically, bills maturing closely following a projected X-date cheapen significantly

leading up to the X-date in most debt limit scenarios (Exhibit 22). Investors tend to shun
these bills for fear of technical default or internal accounting complications. The debt
limit has never led to widespread Treasury disruptions but can strain the market.
Outside of the impact on asset prices, investors’ concerns about the debt limit can have
detrimental effects on liquidity and functioning for some financial markets. Most
notably, in 2011 and 2013, money market funds and other market participants began to
hoard significant amounts of liquidity. There were pronounced outflows from MMF funds
in the 2011 & 2013 episodes (Exhibit 23, Exhibit 24). Money market funds would likely
be concerned about potential redemptions and therefore would choose to move into
more liquid assets such as the Fed's ON RRP facility and away from bills. We also expect
that MMF will prefer to own agency debt vs potentially impacted USTs (agencies are not
subject to the debt limit & can continue to issue or service debt uninterrupted).
Exhibit 23: Gov’t MMF AUM in prior X-dates ($bn chg) Exhibit 24: Prime MMF AUM in prior X-dates ($bn chg)
Govt MMF AUM declined leading up to X date but quickly reversed Prime MMF AUM declined leading up to X date but quickly reversed
80 2011 2021 Average 70 2011 Average 2021
60
50
40
30
20
0 10
-20 -10
T+1
T+2
T+3
T+4
T+5
T+6
T+7
T+8
T+9
T+10
T-9
T-8
T-7
T-6
T-5
T-4
T-3
T-2
T-1
T-0
T-10
T+1
T+2
T+3
T+4
T+5
T+6
T+7
T+8
T+9
T+10
T-9
T-8
T-7
T-6
T-5
T-4
T-3
T-2
T-1
T-0
T-10
Source: BofA Global Research; iMoneyNet Source: BofA Global Research; iMoneyNet
"Treasury only" MMF outflows (Exhibit 25) could be a concern. Treasury only MMFs
cannot invest in ON RRP, only in UST. The risk here is that Treasury only MMFs may see
large outflows and will therefore need to sell UST collateral. This collateral then gets
more difficult to finance, pushing repo and FF higher. Government MMFs have the ability
to use the Fed ON RRP, which provides a liquidity outlet so that in the case of outflows
they can pull funds from the Fed instead of having to sell UST. The MMF outflows likely
go into bank deposits (Exhibit 26).

Exhibit 25: Tsy only Inst'l MMFs around prior X-dates ($bn chg)
Treasury-only inst’l MMFs saw outflows leading up to debt limit resolution
15 2011 Average 2021
10
-5
Source: BofA Global Research; Haver Analytics

Exhibit 26: Bank deposits surrounding previous debt limit episodes ($bn)
Domestic banks saw positive deposit flows around debt limit dates
All Commercial Banks Domestic Banks Large Domestic Small Domestic Foreign
2011 2021 Average 2011 2021 Average 2011 2021 Average 2011 2021 Average 2011 2021 Average
W-6 -214 -44 -120 -364 -59 -143 -315 -32 -108 -49 -26 -35 150 15 22
W-5 -158 -8 -73 -282 -16 -93 -242 11 -66 -40 -27 -27 124 8 20
W-4 -81 -178 -86 -169 -166 -106 -157 -109 -79 -12 -57 -27 88 -11 21
W-3 -112 -74 -73 -195 -37 -92 -171 -20 -68 -24 -17 -25 83 -37 20
W-2 -190 -1 -96 -256 13 -116 -216 21 -91 -39 -8 -25 65 -14 20
W-1 -105 59 -55 -159 66 -72 -131 58 -55 -28 8 -17 54 -7 17
W-0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
W+1 -25 45 -16 -18 34 -22 -20 20 -20 1 14 -1 -7 12 6
W+2 -43 178 -14 -12 160 -17 -12 100 -19 0 60 2 -32 19 3
W+3 -99 228 1 -57 186 1 -44 107 -11 -12 79 12 -42 41 0
W+4 -15 308 55 13 285 59 11 170 30 2 115 29 -28 23 -4
W+5 20 310 88 46 298 91 25 184 54 21 114 37 -26 12 -3
W+6 29 459 86 40 458 96 22 311 55 18 147 40 -11 1 -10
Source: All values relative to W-0. A negative value before W-0 implies deposit inflows. A negative value after W-0 implies deposit outflows
Life after the debt limit is resolved

What happens when the debt limit standoff is resolved?
Assuming the debt limit is suspended or increased in a large & durable way, Treasury is
likely to rapidly rebuild the cash balance & issue additional debt to fund depleted intra-
governmental accounts from EM.
After the debt limit is resolved, we expect a large bill supply wave to follow so that
Treasury can rebuild the cash balance back up to around $700bn by year-end (Exhibit 30,
Exhibit 31, Exhibit 32). Our estimates currently project over $800b of bill supply after an
August debt limit resolution into year-end ’23 (see February refunding).
At the same time, we expect the increase in the TGA to be offset by a decline in ON RRP
take-up and reserves. In our projections, we offset the increase in the TGA with a 90/10
decline in ON RRP/reserves.
We expect the large bill supply wave will cheapen bills & other short-dated coupons. The
cheapening of this paper will pull cash out of ON RRP as MMF & other users extend into
higher yielding alternatives. The large bill supply wave will likely cause some market
indigestion, leading to significant cheapening in bills, in our view.
Potential economic implications from a bipartisan agreement

While negotiations are in their initial stages, there have been some broad outlines
emerging. The outline includes clawing back of unspent COVID funds, energy permitting,

and caps on spending. Negotiations over caps could be one of the more contentious
issues as Republicans are seeking a cap over the next ten years while Democrats are
looking for caps over the next two years.
We believe the caps on future discretionary spending growth would have the largest
effect on economic activity. The caps on spending were an important aspect of the
Limit, Save, Grow Act of 2023 — the House Republican proposal that passed the House.
An earlier score of the bill from the Congressional Budget Office shows that the caps
would reduce discretionary spending by more than $3tn over the ten-year period. As a
share of nominal GDP, the caps would shave roughly 0.5% - 1.2% from nominal GDP per
year, which could have knock-on effects through higher unemployment rates. That said,
the caps would also reduce the deficit which could help put downward pressure on
inflation and spur more private investment.
Exhibit 27: Cumulative bill supply ($bn) Exhibit 28: Changes to CBO’s Projections of Discretionary Spending
We project bill supply to ramp up quickly post DL resolution Under the Caps in the House Republican bill to rais the debt ceiling
($bn)
1400 The caps to spending proposed by House Republicans would be a meaningful
1200 reduction to government discretionary outlays
1000 0 0.0%
800
600
-150 -0.4%
400
200
0 -300 -0.8%
-200
-400 -450 -1.2%
Outlays
Dec-21 Apr-22 Aug-22 Dec-22 Apr-23 Aug-23 Dec-2
Source: BofA Global Research, US Treasury -600 Share of nominal GDP (rhs) -1.6%
23 24 25 26 27 28 29 30 31 32 33
Source: CBO
Exhibit 29: TGA and bill & coupon net issuance forecasts by month ($bn)
Forecasts assuming a June 1 clean debt limit resolution
Financing TGA TGA Marketable Net Net Fed Coupon Fed Bill Net Coupons to the Net Bills to the
Need EOP Change Borrowing Coupon Bills maturities maturities Public Public
1 2 3 = 1 +2 4 5 6 7 4+6 5+7
Jan-23 71 568 121 192 -49 241 55 5 6 246
Feb-23 313 415 -153 160 41 119 60 0 101 119
Mar-23 322 178 -237 85 74 11 56 4 130 15
Apr-23 -305 316 138 -167 -41 -126 60 0 19 -126
May-23 299 70 -246 53 43 10 60 0 103 10
Jun-23 118 250 180 298 77 221 48 12 125 233
Jul-23 230 300 50 280 -56 335 50 10 -6 346
Aug-23 305 400 100 405 25 380 60 0 85 380
Sep-23 -96 600 200 104 91 13 39 21 130 33
Oct-23 196 600 0 196 26 170 52 8 78 178
Nov-23 252 650 50 302 35 267 60 0 95 267
Dec-23 32 700 50 82 108 -26 46 14 154 -12

Exhibit 30: Fed balance sheet projections ($bn)
As TGA refills, ON RRP and reserves will decline
Asset Liabilities
Discount FX
Fed Foreign
UST MBS CMBS Repo Window & Swap Other Currency TGA ON RRP Other Reserves Total
Facilities RRP
PDCF Lines
Apr-23 5266 2576 8 0 74 253 0 436 2324 296 359 2325 176 3132 8613
25%
Reserves / May-23 5206 2551 8 0 5 301 0 437 2336 70 360 2405 177 3159 8508
75% ON RRP
Jun-23 5146 2525 8 0 5 291 0 438 2349 250 362 2145 178 3130 8413
Jul-23 5086 2501 8 0 5 281 0 439 2362 300 363 2003 179 3114 8320
10% reserve Aug-23 5026 2474 8 0 5 271 0 440 2375 400 364 1813 180 3093 8224
/ 90% ON Sep-23 4966 2453 8 0 5 261 0 441 2387 600 365 1538 181 3062 8134
RRP Oct-23 4906 2431 8 0 5 251 0 442 2400 600 366 1442 182 3052 8043
Nov-23 4846 2411 8 0 5 241 0 443 2413 650 368 1304 183 3036 7955
Dec-23 4786 2392 8 0 5 231 0 444 2426 700 369 1166 184 3021 7866
Source: BofA Global Research, Bloomberg, Federal Reserve H.4.1. Note: we use Wednesday end of month values.
Exhibit 31: TGA surrounding DL resolution periods ($bn chg) Exhibit 32: Cumulative bill supply surrounding DL periods ($bn chg)
TGA will likely rebuild quickly following DL resolution We expect a large bill supply wave following DL resolution
1,050 2018 2019 Average 2021 600 2018 2019 Average 2021
900
750 400
600
450 200
300
150 -
-
(150) (200)
T+10
T+20
T+30
T+40
T+50
T+60
T+70
T+80
T+90
T+100
T+110
T+120
T+130
T+140
T+150
T+160
T+170
T-0
T-10
T+10
T+20
T+30
T+40
T+50
T+60
T+70
T+80
T+90
T+100
T+110
T+120
T+130
T+140
T+150
T+160
T+170
T-0
T-10
Source: BofA Global Research, Haver Analytics Source: BofA Global Research, Haver Analytics

Appendix
Exhibit 33: Broad market response to prior debt limit episodes
Market typically doesn’t react until 2 weeks prior
3m bill-
SPX* DXY* VIX** 10Y*** GCF*** OIS***
2011 2 Weeks Prior 6% 1% -5.6 26.9 -22.1 -8.9
1 day prior 3% 0% -1.1 13.2 4.9 -6.0
1 day post 1% -1% -1.4 0.9 -13.2 -9.6
2 Weeks Post -5% -1% 8.1 -39.2 -18.0 -9.0
2013 2 Weeks Prior -2% -1% 1.9 -4.6 -18.4 -7.6
1 day prior -1% 0% 4.0 6.4 -3.6 -1.2
1 day post 1% -1% -1.2 -7.4 -6.8 -7.0
2 Weeks Post 2% -1% -1.1 -12.6 -17.5 -5.3
2015 2 Weeks Prior -3% -2% 0.8 -14.8 6.9 -17.0
1 day prior -1% 0% 0.9 -2.9 3.6 -17.7
1 day post 0% 0% 0.4 -4.0 4.8 -15.6
2 Weeks Post -2% 3% 4.0 9.7 5.8 -16.6
2017 2 Weeks Prior 0% 2% -0.8 16.2 -4.4 -15.8
1 day prior 0% 0% -0.6 -1.2 0.6 -11.7
1 day post 1% 1% -1.4 8.0 2.1 -12.3
2 Weeks Post 2% 1% -2.5 19.9 -5.7 -16.2
2018 2 Weeks Prior 10% -2% -18.0 -19.1 2.8 -10.9
1 day prior -1% 0% 4.4 -2.7 2.9 -0.3
1 day post 1% 0% -3.5 0.7 -1.3 2.0
2 Weeks Post 6% -1% -13.3 1.1 4.0 3.3
2019 2 Weeks Prior 2% -1% -3.2 21.0 23.6 -0.4
1 day prior 1% 0% 0.3 4.8 2.1 4.3
1 day post -3% -1% 7.0 -13.8 -4.8 6.2
2 Weeks Post -1% 0% 0.9 -29.1 -4.0 3.2
2021 2 Weeks Prior -4% 0% 6.7 -12.1 3.0 -5.1
1 day prior 0% 0% 0.0 -3.0 1.4 -3.3
1 day post 1% 0% -0.6 3.7 -0.1 -3.4
2 Weeks Post 3% 0% 0.1 -4.5 3.9 -3.6
*= % change, **= ppt change, ***= bps change
Source: BofA Global Research, Bloomberg
Exhibit 34: Debt limit resolutions

Congress has suspended or increased the debt limit 20 times since 2000
Date Resolution
12/16/2021 $2.5tn increase
10/14/2021 $480b increase
8/2/2019 Suspends debt limit through July 31 2021
2/9/2018 Suspends debt limit through March 1 2019
9/8/2017 Suspends debt limit through December 8 2017
11/2/2015 Suspends debt limit through March 15 2017
2/15/2014 Suspends the debt limit through March 15 2015
10/16/2013 Suspends the debt limit through February 7 2014
2/4/2013 Suspends the debt limit through May 18 2013
8/2/2011 $2.1tn increase
2/12/2010 $1.9tn increase
12/28/2009 $290b increase
2/17/2009 $789b increase
10/3/2008 $700b increase
7/30/2008 $800b increase
9/29/2007 $850b increase
3/20/2006 $781b increase
11/19/2004 $800b increase
5/27/2003 $984b increase
6/28/2002 $450b increase
Source: BofA Global Research, Treasury

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information.

Research Analysts
Ralph Axel
Rates Strategist
BofAS
ralph.axel@bofa.com
Bruno Braizinha, CFA

Rates Strategist
BofAS
bruno.braizinha@bofa.com
Mark Cabana, CFA
Rates Strategist
BofAS
mark.cabana@bofa.com
Katie Craig
Rates Strategist
BofAS
katie.craig@bofa.com
Meghan Swiber, CFA

Rates Strategist
BofAS
meghan.swiber@bofa.com
Anna (Caiyi) Zhang
Rates Strategist
BofAS
caiyi.zhang@bofa.com
Trading ideas and investment strategies discussed herein may give rise to significant risk and are not suitable for all
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Market reaction or suspend the limit until a particular date?

Mark Cabana, CFA

In this note, we address the following topics:

• Debt limit 101

• Debt limit specifics

• Debt limit unthinkable events

• Debt limit market impact

• Life after the debt limit is resolved

2 US Rates Viewpoint | 16 May 2023

Are the debt limit & federal budget or continuing

US Rates Viewpoint | 16 May 2023 3

Is the debt limit the same as a government shutdown and

Source: US Office of Management and Budget, BofA Global Research

4 US Rates Viewpoint | 16 May 2023

A violation of the debt limit, or a government default, meanwhile, constrains the

Importantly, the direct effect is likely to be similar to a government shutdown in the

US Rates Viewpoint | 16 May 2023 5

Where are we in the debt limit process?

Extraordinary measures (EM) are inter-governmental accounting maneuvers that allow

6 US Rates Viewpoint | 16 May 2023

Exhibit 8: Extraordinary Measures as of May 10 ($b)

Debt limit specifics

US Rates Viewpoint | 16 May 2023 7

How will the debt limit be resolved?

8 US Rates Viewpoint | 16 May 2023

Small increase or temporary suspension: It is possible that if the government cannot

US Rates Viewpoint | 16 May 2023 9

10 US Rates Viewpoint | 16 May 2023

Increase the debt limit via a specific dollar value or

US Rates Viewpoint | 16 May 2023 11

Equally important to payment prioritization ability is political willingness. Prioritizing

Possibility of delaying UST payments: if Treasury decides not to prioritize UST

12 US Rates Viewpoint | 16 May 2023

Is the US sovereign rating at risk?

Exhibit 13: Current US ratings

What are the implications of a US downgrade on fixed

US Rates Viewpoint | 16 May 2023 13

Debt limit market impact

14 US Rates Viewpoint | 16 May 2023

600 550 1.00

What has been the impact on financial markets?

12% 30 2011 Average 2021

US Rates Viewpoint | 16 May 2023 15

Source: BofA Global Research, Bloomberg

16 US Rates Viewpoint | 16 May 2023

Historically, bills maturing closely following a projected X-date cheapen significantly

US Rates Viewpoint | 16 May 2023 17

Source: BofA Global Research; Haver Analytics

Life after the debt limit is resolved

Potential economic implications from a bipartisan agreement

18 US Rates Viewpoint | 16 May 2023

US Rates Viewpoint | 16 May 2023 19

20 US Rates Viewpoint | 16 May 2023

Exhibit 34: Debt limit resolutions

US Rates Viewpoint | 16 May 2023 21

22 US Rates Viewpoint | 16 May 2023

Other Important Disclosures

US Rates Viewpoint | 16 May 2023 23

24 US Rates Viewpoint | 16 May 2023