Debt ceiling concern emerges in Treasury bills

  • Mario Tama/Getty Images

    Congress must vote by mid-October on whether to raise
    America’s debt ceiling or risk defaulting on its

  • Treasury investors are demanding a higher return on
    bills that mature around the vote, signaling concerns that the
    government may default.

A mid-October showdown is brewing in Congress, and investors have
been served notice. 

According to the Congressional Budget Office, lawmakers need to

raise America’s debt limit
by early-to-mid-October to avoid a
default on loan payments. 

Congress’ initial goal was to vote to raise the limit before
its August recess. But the prolonged and failed debate over

healthcare reform
set that plan aside.

Investors in the Treasury bills market are bracing for turmoil
when the vote is likely to take place. 

The Treasury department auctions bills that mature within a
year or less as a short-term way to borrow from the

The chart below plots yields on Treasury bills that mature from
now through the end of January 2018. It shows that investors are
requiring a higher premium to hold the bills that mature during
the weeks in mid-October when the debt ceiling could potentially
be breached. 

yields arrow

Business Insider/Andy Kiersz

A normal curve would have a gentler upward slope. Investors
generally expect interest rates to rise in the future unless they
expect a recession. And, they demand an extra premium for holding
on to longer-term Treasury bills.

“The [yield] curve has this big kink in it now because the market
is pricing in some chance that there is the risk of missed
payments,” said Brian Nick, the chief investment strategist at
TIAA Investments. 

“I don’t see it as a likely scenario that they would let, due to
internal disagreements, the debt ceiling be breached again,
especially because everybody knows how this ended the last time,
and it was ugly,” he told Business Insider.

For clues on why investors would worry about the debt ceiling, a
of the crisis of 2011 is in order. 

In January 2011, Treasury Secretary Timothy Geithner notified
Congress that the US would likely need to breach its lawful
borrowing limit of $14.3 trillion. But Republican House Speaker
John Boehner set up a showdown when he said a budget that would
pass needed to cut government spending. 

Both parties eventually agreed on a budget deal that avoided a
government shutdown, but left outstanding the issue of the
federal debt limit.

In August of that year, Standard & Poor’s downgraded
America’s credit rating for the first time, while Moody’s issued
a warning. The move rocked global markets,
 about $2.5 trillion in stock-market value and
sending gold and Treasuries to a record high.

It’s unlikely that a Congress dominated by one party would allow
another debt crisis or a default, Nick said. But the Treasury
market’s premonition is something to keep an eye on.

“We haven’t seen lots of unusual political news leak into
financial markets this year, but I think we’re starting to,” Nick

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