The 2025 U.S. Debt Limit Through the Lens of Financial Markets

Luca Benzoni and Marisa Wernick

No WP 2025-07, Working Paper Series from Federal Reserve Bank of Chicago

Abstract: We examine the 2025 U.S. debt limit episode through the lens of financial markets. First, we document an increase in trading activity in the U.S. sovereign CDS market, and we infer a probability of default from CDS premiums. We find that default risk reached 1% by the November 6 Presidential election, fell quickly after that, and progressively climbed back up in subsequent months to the current 1.1% level. Overall, these estimates are well below the default risk estimates for the debt-limit episodes of 2011, 2013, and 2023, which range from 4% to 6%. Second, so far we only find small distortions in the market for Treasury bills that mature around the “X-date,” when Treasury is expected to extinguish its existing resources, and thus would be most affected by a hypothetical default. This is in contrast with the 2023 episode, when bills maturing around the X-date traded with a yield that was about 1% higher than those maturing in other months. Third, we discuss the broader consequences that debt-limit events can have for the level of bank reserves at the Federal Reserve, and their implications for money markets liquidity.

Keywords: U.S. Default; Default probability; CDS; Debt limit (search for similar items in EconPapers)
JEL-codes: E32 E43 E44 G10 G12 G18 G28 (search for similar items in EconPapers)
Pages: 33
Date: 2025-05-27
New Economics Papers: this item is included in nep-mac
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DOI: 10.21033/wp-2025-07

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