Market Extra: U.S. debt ceiling fears surface in “kink” in Treasury bill yield curve as drop-dead date approaches

Investors say growing fears that Congress will fail to raise the U.S. borrowing limit in sufficient time is cropping up in short-term Treasury bill yields.

Elevated yields for Treasury bills due between September and October reflects concerns that Democrats and Republicans will struggle to reach a deal on the debt ceiling before the so-called drop-dead date when the U.S. government runs of cash after hitting its borrowing limit in March this year.

A report by the Bipartisan Policy Center this week said the U.S. government may need to raise the debt ceiling by early September, a month earlier than previously forecast. Paul Ashworth, chief U.S. economist for Capital Economics, said the U.S. government was running out of cash but added that the Treasury Deposit Account still had $250 billion at the end of last week.

Treasury Secretary Steven Mnuchin said Congress should try to lift the borrowing limit before lawmakers went out on its summer recess for most of August and the first week of September.

But House Speaker Nancy Pelosi has said the House would not pass legislation raising the debt ceiling, unless the Trump administration agreed to increase spending limits on domestic programs.

White House officials also want to avoid another chaotic government shutdown if Congress doesn’t approve a funding bill by the end of September after many agencies were caught unprepared during the ­35-day shutdown that began in December 2018.

A Treasury bill due to mature in Sep. 12 was trading higher than its neighboring maturities at around 2.20%. A bill maturing in Aug. 22 TMUBMUSD01M, +0.70% had a yield of 2.16%, and a bill maturing in November 14 was sporting a rate of 2.09%. Debt prices move in the opposite direction of yields.

“You are seeing that kink in Treasury bills. We definitely do see that with the debt ceiling issue,” said Eric Souza, senior portfolio manager at SVB Asset Management.

See: Washington’s latest debt-ceiling fight could mean ‘volatile month’ for markets, analysts warn

An auction for three-month Treasury bills TMUBMUSD03M, -0.26%   on Monday also struggled to draw buyers, compared to the six-month auction, suggesting a material dent in demand among buyers of highly liquid short-term debt securities.

“The maturity dates drove the demand this week, as the October maturity of the 3-month scared away investors who were concerned about the debt ceiling,” wrote Thomas Simons, senior money market economist at Jefferies.

Still, Souza say because the U.S. government’s borrowing limit has always been ultimately raised, many market participants are “numb” to the looming drop-dead date.

In fact, investors have often used the opportunity to stock up on these higher-yielding maturities as such kinks become swiftly erased once the debt-ceiling negotiations are resolved.

“It happens all the time,” he said.

The U.S. government spends about $900 billion more than it brings in through revenue each year, and it covers the difference by issuing debt, a way of borrowing money, but it can issue debt only up to a certain limit set by Congress. Congress last suspended the debt limit in 2018, but that suspension expired in March.

The debate over the U.S. government budget and the debt ceiling has produced fiscal crises at least twice in the past decade in 2011 and 2013. On 5 August 2011, the credit rating agency Standard & Poor’s issued the first ever downgrade in the federal government’s credit rating as a result of the delay in reaching agreement in Congress.

The credit downgrade and debt ceiling debacle contributed to the Dow Jones Industrial DJIA, +0.67%   falling nearly 2,000 points in late July and August that year. Following the downgrade itself, the DJIA had one of its worst days in history and fell 635 points on August 8, 2011.

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