The struggle in Congress to fund the federal government and raise the U.S. debt-ceiling is impacting the nearly $21 trillion Treasury market in two different ways.
The broader U.S. government-bond market — focused on maturities from one year and out — is essentially nonplussed by what it sees as Congressional theatrics, even as Washington teeters closer to a possible government shutdown at midnight Thursday if government funding is not approved and a possible default if the nation’s debt limit is not raised in the next three weeks, analysts say.
Meanwhile, the market for bills — or short-term debt obligations backed by the U.S. Treasury — reflects greater worry, with certain issuances increasingly hard to trade, given the Treasury is likely to exhaust measures to avoid a debt default if Congress has not acted to raise the debt limit by Oct. 18.
On Tuesday, Treasury Secretary Janet Yellen said by Oct. 18 her department “would be left with very limited resources that would be depleted quickly.”
“For the broader bond market, it’s fair to say that the market knows we’ve seen this movie before and the likelihood of an economic calamity coming out of a government default is really, really low,” said Thomas Simons, a money market economist at Jefferies LLC. “It’s more of a self-engineered problem that can be fixed by Congress.”
“But in the front end, where supply is very low, bills that mature at dates around potential defaults are trading at higher yields and are very hard to trade,” Simons said via phone Tuesday. “Liquidity will continue to worsen until we get an agreement to raise the debt ceiling, but there shouldn’t be a sense of panic that intensifies between now and then.”
The rate on 1-month Treasury bills
for example, shot up to as high as 0.0837% on Tuesday, from 0.0406% earlier in the day, according to FactSet. That’s the highest level since January and even a touch higher than where the yield on the 1-year note
traded — reflecting just how limited the demand for the 1-month bill currently is. The 1-month yield also was higher than the rates on 2-, 3- and 6-month bills.
Meanwhile, Treasury yields further on the curve out rose for reasons that were unrelated to the debt-ceiling debate. The broader selloff in U.S. government debt was sparked by growing inflation fears, pushing the 10-year Treasury yield further above 1.5% after it had briefly breached that level in the previous session.
On Monday, Treasury prices “fell through technical levels, which caused a real rush for the exit among people who were long, and invited back in people who were short,” said portfolio manager Tom Graff, head of fixed income for Brown Advisory in Baltimore, which oversaw about $128 billion in client assets as of June. Meanwhile, “the market is looking past the debt ceiling issue, and assuming it gets worked out.”