What Is the Debt Ceiling and Why Does It Matter?

Debt ceiling battles are nothing new on Capitol Hill: Congress has raised the limit 79 times since 1960. But during the past two decades, what was once a routine vote has become one of the most politically contentious issues that Congress faces. But what is the debt ceiling, and why does it matter?

The debt ceiling is the total amount the U.S. government is authorized by Congress to borrow to meet its existing obligations, including interest payments on Treasury securities. The federal debt was $38.4 trillion as of January 12th, 2026, per the U.S. Treasury's FiscalData website. The debt ceiling was set at $41.1 trillion in the "One Big Beautiful Bill Act," signed by President Donald Trump in July 2025. Typically when the debt approaches the ceiling the Department of the Treasury has used accounting maneuvers (referred to as "extraordinary measures") to stay under the U.S. debt limit and continue paying government obligations, includingincluding Social Security and Medicare. Once the debt ceiling is reached, unless it is raised again or suspended, the government will eventually run out of money to pay its bills, risking a default.

The debt ceiling does not authorize new government spending. Instead, it allows the Treasury to borrow funds needed to pay for spending that Congress has already approved through the federal budget, including mandatory programs and interest on existing public debt. When the ceiling is not raised or suspended, the government may be unable to issue new debt, even though it remains legally obligated to make payments.

Over time, as debt levels have grown and budget deficits have persisted, votes to raise the debt ceiling have become more frequent and more contentious. Lawmakers have increasingly used debt ceiling deadlines as leverage in broader debates over federal spending cuts, tax revenue, and fiscal policy. These recurring impasses can create uncertainty for financial markets and the broader economy.

If the U.S. government should fail to make interest payments on Treasury securities, it would have "defaulted" on its legal debt obligations and the market reaction likely would be very negative. That's because default could lower the credit rating for Treasury securities, making them appear riskier to investors, who can be expected to demand higher yields as compensation.

Higher Treasury yields can push up other borrowing costs via rising interest rates, including mortgages and auto loans, leading consumers to delay or forgo purchases and potentially slowing the U.S. economy. Prolonged debt ceiling impasses can also disrupt the Treasury's ability to issue new debt, and constraints on issuance may lead investors to demand higher yields across Treasury markets, from short-term Treasury bills to longer-dated Treasury bonds.

The U.S. has hit the debt ceiling before but never defaulted on its debt obligations. Treasury securities are backed by the "full faith and credit" of the U.S. government, and the government's credit historically had been perfect: For decades, it was rated AAA/Aaa, the highest possible rating, by all three major credit rating agencies. ¹ That changed in 2011, when S&P downgraded its rating to AA+ during a debt ceiling battle. Fitch downgraded the U.S. to AA+ in 2023 following another debt ceiling battle, and Moody's downgraded it to Aa1 in May 2025, citing rising government debt.

We don't know, but it probably wouldn't be good. Investors may recall that the S&P 500 index was very volatile in May 2023 as Congress tried to reach a deal on the debt ceiling before the government ran out of cash on June 1, 2023—ultimately, a bill passed Congress on June 1 and was signed by the president on June 3, avoiding a default.

If Treasury securities should default, it could trigger SEC Rule 2a-7, which generally requires a money market fund to sell a defaulted security. However, the rule allows a money market fund to continue to hold the defaulted security if the fund's board of trustees determines that its sale would not be in the best interests of the fund and its shareholders.

In the event of a default, repayment of maturing Treasury securities could be delayed until the debt ceiling is raised. Assuming an agreement eventually is reached, investors would receive their interest and principal payments, likely with extra accrued interest.

During periods of uncertainty around the debt ceiling, Treasury investors may want to:

• Consider the consequences of a delayed repayment for Treasury securities that mature soon after the potential default date. If you are relying on an on-time payment of a maturing Treasury security, consider whether there are other solutions available for covering that spending.
• Focus on high-quality, higher-rated investments, rather than corporate junk bonds or emerging-market bonds. If the economy should weaken or the U.S. government default, those high-risk debt instruments likely would come under the most pressure. However, just because an investment is high-quality and higher-rated doesn't mean it's risk-free.

The "One Big Beautiful Bill Act" that was passed in 2025 includes a $5 trillion increase in the federal debt ceiling. That should be enough to ensure that the debt ceiling is not an issue again until 2027.