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

Abstract

We compute the probability of a U.S. default from sovereign CDS premiums. Default risk reached 1% by the November 6 Presidential election, fell quickly after that, and progressively climbed back up to 1.2% in April 2025. These estimates are well below those for the debt-limit episodes of 2011, 2013, and 2023. Trading in the U.S. CDS increased as the debt limit was approaching, though the market has remained tiny relative to the amount of government debt. Finally, we examine demand and supply shocks triggered by debt-limit dynamics and their effect on Treasury rates and money markets liquidity.