US debt ceiling angst sends Treasury bill yields higher

Investors are demanding greater compensation to own US Treasury bills maturing in early October, as Wall Street faces the prospect of a contentious debate in Washington over raising the country’s debt ceiling.

Although US Treasury secretary Steve Mnunchin has said that Congress needs to raise the ceiling by September 29, investors and traders expect the government’s ability to pay all its obligations, including to creditors, will expire sometime in the first two weeks of October.

That has left Treasuries maturing on October 15 trading at a premium of 17 basis points to comparable debt maturing on November 15 and September 15, either side of the debt ceiling deadline.

“There is no advantage in getting involved in something that could get messy later,” said Louis Crandall at Wrightson Icap, of investors backing away from owning the debt.

Other Treasury securities maturing in the first weeks of October are also trading with elevated yields, with the potential for further market action as the deadline draws nearer, said analysts. An auction of Treasury bills set for early next week will be closely watched, with the debt set to mature on October 7.

“There are some people worried about all October bills,” said Thomas Simons, a money market economist with Jefferies. He added that “there were some investors who said they wouldn’t traffic” in any three-month bills auctioned earlier this year that are also set to mature in October.

Congress is expected to take up the debate over the country’s self-imposed borrowing limit when it is reconvened next week after the Labor Day holiday, handing the administration roughly four to six weeks before a potential default.

Money managers and policymakers will receive an update next week when the Treasury releases its monthly statement of public debt, which will detail how much of its extraordinary borrowing authority remains.

“There is reasonable agreement in Congress that something needs to get done,” Mr Simons added. “This isn’t like past episodes when some Congressmen thought the debt ceiling didn’t need to get raised or used it as leverage to get more spending cuts . . . [Republicans] don’t want the responsibility of leading us to default on their hands.”

As the debt ceiling deadline looms, the US Treasury has been forced to cut its debt issuance, with the net supply of T-bills falling by $30bn in the second quarter.

The US Treasury raised $25bn on Tuesday in what was thought to be the last four-week bill auction to avoid any contamination from debt ceiling fears. The bills, which mature on September 28, were sold with a yield of 0.96 per cent, in line with market expectations.

A measure of investor appetite at the auction, the so-called bid-to-cover ratio, climbed to its highest level since March. The sale on Tuesday was the smallest since early March, when the Treasury raised $15bn in a bill sale.

“It’s a weird trade off,” said Michael Cloherty, an interest rate strategist at RBC Capital Markets. “Because of the debt ceiling there has been very little bill issuance so you have created scarcity, which should push yields lower.

“But you don’t want to own the bills that could conceivably have delayed payment. So overall bills are holding in but the few issues where you could have payment delay will trade cheaper and see yields rise if this continues.”

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