Featured Image

Portfolio Stress Testing the US Debt Ceiling: Today Vs. 2011

Risk, Performance, and Reporting

By FactSet Insight  |  May 18, 2023

Only 72 hours. In 2011, that was the estimated time remaining until the US would have defaulted on its debt. That crisis 12 years ago shook financial markets, tested investor resilience, and resulted in a downgrade of the US credit rating.

Today, amid bipartisan negotiations as of this writing, the US government again faces the potential of a debt default. This has raised concerns among risk and portfolio managers about the potential impact on their investments.

Portfolio Stress Testing for the Potential Shock of a Debt Default

In times of market uncertainty with the potential for a shock, stress testing is a powerful tool to assess portfolio resilience and identify vulnerabilities. Investors who analyze historical data from the previous crisis gain insights into potential impact today so they can develop strategies to mitigate risk.

Amid the negotiations in Washington, what is the estimated date of default, or X-date? According to Treasury Secretary Janet Yellen’s letter, it could be “as early as June 1” when the federal government will be unable to continue to satisfy all its obligations. As that might be a conservative estimate, it is likely US borrowing power won’t be exhausted then.

Following are key upcoming dates. Without a debt-ceiling deal, the US could face a technical default somewhere in the following time frame:

  • June 15 is when the corporate revenue tax comes in

  • June 30 is when new extraordinary measures would start kicking in to buy some additional time

  • That moves us from late July to mid-August as the most probable period for the X-date

How to Determine Historical Scenarios for Testing in Today’s Market

With the clock ticking, risk managers are focused on two main directions:

  • Approaching the X-date without a deal. After June 1, markets are likely to become more sensitive. Short-term debt would be avoided and there could be an increased sensitivity to new negative economic data.

  • Reaching the X-date without a deal. It would be a severe scenario—a historical first—with large effects on the US and global economies.

In our view, a stress test should be extreme but plausible. That is why we’ve chosen extreme-event stress testing to analyze the first scenario—how the markets could react to approaching the X-date without a deal.

Since 1960, the US government has reached its debt ceiling 78 times. It is clearly a recurring event. Most of the time the ceiling was raised without any objections. But on a few occasions, that was not the case and prolonged debates between parties influenced financial markets.

To properly gauge the risk in a portfolio, we selected the 2011 episode as the most severe of the 78.

We next defined start and end dates for the test scenario. In doing so, we kept in mind that some asset classes might move in opposite directions before pivoting to become tightly correlated.  

Selecting a Start Date

To define a start date for this historical scenario, we would need to find a good combination between a fundamental event and the subsequent market reaction. We can begin the search with May 16, 2011, when the debt ceiling was reached. However, it’s not the optimal start date for our extreme event stress test because there are 77 other scenarios when reaching the debt ceiling did not cause market turmoil. As visible on the following VIX chart (Figure 1), there were no extreme market movements after the US reached its ceiling.

Figure 1: CBOE Volatility Index, VIX


The situation around May 16 was a period of relative calm, with no sharp movements that could indicate unrest or fear. The markets were relatively calm because there was enough time to negotiate a deal before the Treasury Department’s August 2, 2011, estimated X-date.

The turning point seems to be July 7, 2011. After hosting a meeting between both parties at the White House, President Obama said Republicans and Democrats remained far apart on many issues. That, combined with the fact there was less than one month to the X-date, finally got to the nerves of investors, who started to prepare for bad times (Figure 2).

Figure 2: Russell 2000 Index Chart


The market reaction after President Obama’s meeting can be described as identical for most of the major indices. Let’s look at the chart of Russell 2000 (Figure 2), when July 7 was the market’s second-to-last attempt to move higher before falling significantly.

The market reaction to a key fundamental event (the meeting) is what makes July 7, 2011, a good starting date for our historical scenario in the stress test.

Selecting an End Date for the Stress Test

Selecting an end date is difficult because, for example, the market turmoil rarely subsides after the initial stressor event has ended. There is a possibility the initial event triggers new market-moving events, adding more stress and accelerating the declines. That was the case in 2011 when the credit agency Standard & Poor’s downgraded the US government’s credit rating to AA+ from AAA (the highest rating).

In such a situation—where negative effects could last beyond the end of the initial stressor—it is better to select an end date based on a specific market reaction. Something that indicates the stressor was resolved and signals the start of a recovery.

One way to do that is to look for major stock market bottoms. (Start of a recovery is not possible without a general upbeat in the stock markets.) Two possible end dates are August 8, 2011, and October 3, 2011. As seen in the S&P 500 chart in Figure 3, both dates are market bottoms.

Figure 3: S&P 500 Index Chart


With that, we have two extreme event scenarios from which to choose. The first one encompasses only one month from July 7, 2011, to August 8, 2011. The second is almost three months long, starting again on July 7, 2011, and ending October 3, 2011.

It is now time to go to Portfolio Analysis in the FactSet workstation to test how a few different portfolios would perform in both end-date scenarios.

Figure 4: Extreme Event Stress Test


The better end date is the scenario with the largest shock: the three-month scenario. You can see in Figure 4 that all the stressed portfolios using October 3, 2011, experience the largest shocks—especially for the 60/40 and High Yield portfolios.

The High Yield portfolio is very important for the qualitative side of the best end-date question. It is expected the longer time period would produce a bigger shock. So, we cannot rely only on this. We need to see true signs of recovery. One of which would be a demand in high-yield bonds.

It is clear from the stress test results that two additional months in the second extreme event scenario were not enough for investors to start loading riskier assets. On the contrary, the flight to quality continued, and the high-yield bonds suffered more losses.

Another reason for choosing the end date in October could be volatility. Usually when the stressor is no longer present, volatility starts to decline. Notice back in Figure 1 how VIX prices remained elevated, and only after the VIX reached a second top on October 3, 2011, it began to diminish, indicating the stressor was resolved.

In our case, the better end date is October 3, 2011, but that also depends on the main idea behind the stress test and the structure of the portfolio. Adding those considerations, it might be better to choose the one-month scenario.

Is This Time Different?

Historical stress tests are good tools for risk managers, but they don’t guarantee markets today will react the same as they did in 2011. For that reason, you might also want to consider the answers to a substantial question: Is this time different?

For example, today’s political environment is materially different given Congress is arguably much more polarized. According to the Pew Research Center, “Democrats and Republicans are farther apart ideologically today than at any time in the past 50 years.” 

Markets are also different. The most notable difference is that what happened in 2011 can be considered an extreme event during peacetime. It was two years after the Great Recession ended, the markets were supported by the second round of quantitative easing, and major stock market indices were trying to reach new all-time highs.

Conversely, in 2022 the major stock market indices entered bear-market territory accompanied by a severe decline in the bond market. Most recently, weakness in the banking sector continues following the notable collapses of Silicon Valley Bank and Credit Suisse.

Altogether, today’s environment is closer to a wartime definition, which might have intensified the banking-sector shocks, for example. That calls for combining the historical with a composite factor stress test. The latter might answer the question of how the portfolio could react if one or more sectors experience a larger shock now compared to 2011.


Amid Washington negotiations and the hope for a deal soon, it’s important to test and prepare portfolios for the related risks. For example, some investors might pivot to quality, while others might employ hedging strategies to mitigate risks.

Although it happened more than a decade ago, insights from the US debt ceiling crisis in 2011 might offer the key to what investors might do if a deal takes too long. That is why an extreme event stress test, with precise dates, provides an understanding of how markets might react this time.

To learn more about the 2011 US debt ceiling scenario, FactSet clients can visit the Online Assistant page: Extreme Event Stress Test Scenarios.

Authors of this content include FactSet's Full Valuation Risk Team: Vassil Banov, Aleksandar Panayotov, Ivan Topalov, Detelin Sertov. 

This blog post is for informational purposes only. The information contained in this blog post is not legal, tax, or investment advice. FactSet does not endorse or recommend any investments and assumes no liability for any consequence relating directly or indirectly to any action or inaction taken based on the information contained in this article.

Subscribe to FactSet Insight


The information contained in this article is not investment advice. FactSet does not endorse or recommend any investments and assumes no liability for any consequence relating directly or indirectly to any action or inaction taken based on the information contained in this article.