The debt limit is still a thing

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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.

Good morning. Yesterday, President Donald Trump insisted that there will be “no exceptions” to the August 1 tariff deadline. That might be true, in the sense of “reciprocal” tariffs being imposed on that date. Does it mean negotiations will be over — or will have even begun in earnest? Of course not. On August 2 we won’t know any more about where the US tariff rate will ultimately settle than we do right now. Email us: unhedged@ft.com.

The debt limit

The consensus view of Trump’s budget is that it worsens the US’s fiscal trajectory, and that this is bad. This newsletter agrees. But the bill, whatever its other sins, did reduce the risk of a US default in one important way. Wedged in the bill was a $5tn increase to the debt ceiling, the largest one-time statutory increase in history. This brings the US’s borrowing limit to $41tn. The price of a one-year US credit default swap — a direct hedge against the possibility of a US sovereign default — has been declining since May, and fell hard in the middle of last week:

The US’s last debt ceiling suspension expired in January, capping US borrowing at $36tn. Ever since, the Treasury, forbidden from issuing net new debt, has been spending down its account at the Federal Reserve to keep the country solvent. That account was predicted to run dry sometime later this summer. As the fall in the CDS price since May suggests, markets had already been expecting a solution, and approve of the one we got. 

The ceiling increase took an interesting form. Congress vacillates, without much apparent rhyme or reason, between increasing the debt ceiling by statute and suspending it for a fixed period. In the latter case, the level of the debt at the end of a suspension becomes the new debt ceiling.

Over the past 10 years — and particularly in Trump’s last term — Congress has tended towards suspensions. Below is a graph of the US’s debt limit (blue) plotted against the amount outstanding (red). Periods with only red and no blue are where the debt limit was suspended. 

The Covid-19 pandemic happened in the middle of a suspension. The various federal responses to that crisis raised the US debt by $5.7tn over two years — the fastest clip of borrowing in the country’s history in nominal terms.

Last week’s $5tn increase may provide some relief to the market; investors now know how much runway the government has. Alexander Arnon of the Penn Wharton Budget Model said: “It’s nice to actually have a real significant debt ceiling increase. It takes [fights over the debt ceiling] off the table for [a few years] . . . And it is nice to see an actual number, as opposed to a suspension.”

But, in reality, the US does not have all that much fiscal space. As Arnon noted to Unhedged, the spending proposed by the new budget will help bring us to the new ceiling fairly quickly. The Congressional Budget Office estimated it will add more than $3tn to the debt over the next 10 years. That implies we will hit the new debt ceiling in mid-2027. The games of debt-ceiling chicken, which markets hate, will recommence before you know it.

Copper

Copper markets had been behaving strangely for some time. The threat of Trump tariffs pulled supply into the US and raised the US price, creating an arbitrage opportunity between US and global prices. Midday yesterday, the threats became more vivid. The president said “today we’re doing copper”, and that he believed the tariff would be 50 per cent. It’s unclear when exactly that tariff would begin, if it does. But within the hour, the US copper price rose 11 per cent. It finished the day at a record high.

If 50 per cent is the tariff rate, that’s higher than the market expected, according to Andy Cole at Fastmarkets. But, compared to the size of the potential tariff, the move was still relatively restrained. The US copper price had already risen somewhat in anticipation, said Cole. Shares of the big copper miners were restrained today, too. Freeport-McMoRan, the biggest copper producer in the US, jumped 2.6 per cent.

The relatively modest move also makes sense from a supply/demand perspective. The US is well-supplied for the next few months. According to S&P Global, the US imported 44 per cent of its refined copper from 2019-2023. But Cole at Fastmarkets said: “Up to about half a million tonnes may have been imported or are en route. That’s effectively enough to cover US copper consumption for nearly one-third of a year.”

Interestingly, shares in companies that are reliant upon copper barely moved. Utility stocks did take a hit yesterday, but most moved before Trump’s announcement. Big Tech stocks, whose artificial intelligence data centres are massive copper consumers, were unaffected. According to Rogan Quinn at the Rhodium Group, about 10 per cent of construction project’s materials costs are copper. But home builders such as Pulte and Lennar were indifferent, too.

One possible reason for this is wearyingly familiar: the stock market doesn’t have enough information to assess the impact of the tariff. Here is Quinn:

The existing North American wire and cable supply chain is also integrated across Mexico, the United States and Canada. Refined copper often travels from the United States to Canada to be turned into copper rod before being reimported and turned into wire and cable. The United States imports most of its refined copper from Chile. If copper travels from Chile and is tariffed before entering a Comex warehouse then sent to Canada for rod fabrication, would it be tariffed again when it re-enters the United States? There needs to be additional clarity on the details of the anticipated tariffs …

Alternately, the stock market may think Trump will change his mind before US inventories are depleted. As we said yesterday, it is still early days.

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