TradingKey - As the deficit rises, the issue of the U.S. debt ceiling has once again become a central focus in American politics. On Wednesday, former President Donald Trump took to his social media platform, Truth Social, to declare that the U.S. should abolish the debt ceiling system.

He stated that he has reached a consensus with Democratic Senator Elizabeth Warren, agreeing that the debt ceiling should be completely eliminated to prevent economic catastrophes. "It is too destructive and should not be in the hands of politicians looking to exploit it," Trump asserted.

Trump's desire to abolish the debt ceiling is not unrelated to his ambitious policy proposal, "One Big Beautiful Bill." According to an analysis released on Wednesday by the Congressional Budget Office (CBO), this bill would reduce taxes by $3.75 trillion over the next decade while increasing the deficit by $2.4 trillion.

The debt ceiling sets a cap on the total amount of debt the U.S. government can incur. However, in practice, whenever the debt approaches this limit, lawmakers engage in heated debates. Historically, the U.S. has come close to default multiple times, yet almost every time, Congress has raised or suspended the debt ceiling at the last moment to avert economic disaster.

U.S. Debt Hits Limit, Markets Fear Default

As early as March this year, the CBO indicated that the U.S. Treasury had reached the $36.1 trillion debt limit by early January, leaving no room for borrowing except to refinance maturing debt. U.S. Treasury Secretary Bessent urged Congress to extend the debt ceiling by July (before the August recess) to avoid triggering an economic crisis.

The U.S. debt market has already shown concern about a potential default. June started unfavorably for U.S. Treasuries, with the yield curve rising across the board; the 30-year Treasury yield briefly surpassed 5%, and the 10-year Treasury yield reached a high of nearly 4.47%.

According to data from the London Stock Exchange, the spread on U.S. Treasury credit default swaps (CDS) has been rising throughout the year, now hovering near its highest level in two years. The surge in CDS spreads typically coincides with heightened market concerns over the U.S. government's debt ceiling. The 5-year CDS spread is now approaching 50 basis points, up from around 30 basis points at the start of the year. The 1-year CDS spread has climbed from 16 basis points earlier this year to 45 basis points now.

The precarious situation of U.S. debt has compelled the Treasury to take action. Faced with a Federal Reserve reluctant to cut rates, Secretary Bessent intervened, conducting quantitative easing (QE) on behalf of the Fed. On Tuesday afternoon, the Treasury announced an unprecedented $10 billion government bond buyback.

Trump's proposal to abolish the debt ceiling has also faced opposition. His "former ally" Elon Musk intensified his criticism of the "Big Beautiful Bill" on Wednesday, suggesting the drafting of a new spending bill to avoid a significant increase in the deficit and prevent raising the debt ceiling by $5 trillion.

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