On Wednesday, concerns over whether a timely resolution on the debt ceiling could be reached led to yields on Treasury bills maturing in early June surpassing 7%. Volatile trading and conflicting data added to the fluctuations in rates. While Tradeweb reported that yields for bills maturing on June 1 and June 8 remained above 7% at 4 pm Eastern time, Bloomberg data indicated rates below 7% later in the day.
These rates reflect the yields on government obligations maturing shortly after the “X-date” of June 1, when Treasury Secretary Janet Yellen warned of the possibility of the government being unable to meet its financial obligations without action on the debt ceiling.
The Treasury bill market is experiencing the most significant impact from debt ceiling concerns, with investors questioning the likelihood of payment delays after June 1. Currently, the T-bill market is experiencing dislocation, with yields ranging from as low as 2.614% for bills maturing on May 30 to as high as 6.881% for those maturing on June 1, according to Bloomberg data.
Higher yields indicate increased investor demand for compensation for holding bills considered riskier. Yields also rise when investors sell or avoid securities with a particular maturity. On Tuesday, rates began surpassing 6%, coinciding with a government auction of 21-day T-bills that produced a 6.2% yield. The latest market movements suggest that investors and traders are increasingly factoring in the risk of a debt-ceiling resolution not being reached by the X-date.
Lawrence Gillum, Chief Fixed Income Strategist at LPL Financial, noted that the market perceives bills maturing in early June as risky due to the potential for delayed payments. While markets still expect a resolution, cautious money managers are avoiding these T-bills.
Additionally, money market funds appear to be moving into the T-bill maturing on May 30, just before the X-date, as a precautionary measure.
Initially, the broader financial market seemed relatively confident that a debt-ceiling agreement would be reached by June 1 following positive statements from President Joe Biden and House Speaker Kevin McCarthy. However, McCarthy’s subsequent remarks on Tuesday about negotiators not nearing a deal raised skepticism among House Republicans. McCarthy sounded slightly more optimistic on Wednesday, stating that debt-ceiling talks were progressing.
Debt-ceiling concerns weighed on the market, leading to lower performances for all three major U.S. stock indexes on Wednesday. Meanwhile, yields on one- to 30-year Treasuries increased as traders focused on the Federal Reserve’s May meeting minutes, which suggested a possible interest rate hike.
Gillum and Greg Faranello, Head of U.S. Rates at AmeriVet Securities, both acknowledged a small chance of no debt-ceiling agreement by June 1. In such a scenario, the Treasury market could experience disarray, with T-bill yields surging similarly to last year’s confidence crisis in the U.K. bond market. It would also complicate the Fed’s ability to raise rates on June 14 and likely trigger a flight to quality, with investors turning to longer-term Treasuries while equities decline.
Faranello noted signs of stress in the T-bill market on Tuesday and Wednesday, emphasizing that the economy was performing better than the recession narrative suggested. He did not rule out a move toward 4% in the 10-year rate this year but acknowledged that the outcome of the debt-ceiling debate could quickly change the situation.
Faranello highlighted the challenge of reaching a debt-ceiling agreement by June 1, with the risk of default being small but not zero. He also expressed concerns about potential chaos if negotiators push the deadline too closely, leading to confusion in the Treasury market.
Confusion is already apparent, he concluded.
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