Treasury Bill Rate Curve Inverts Amid Debt-Ceiling Showdown

Rates on Treasury bills maturing around the time the U.S. is forecast to run out of money to pay its obligations are higher than those on longer-maturity securities, suggesting investors are concerned lawmakers may fail to agree to lift the debt ceiling.

Feb. 28 bill rates rose to 0.108 percent, an increase of 2 basis points, or 0.02 percentage point, and the highest since Nov. 14. That compares with 0.08 percent for bills due April 18. At the end of last year, the April bills yielded 7 basis points more than the February securities.

“You can see the debt-ceiling-related move pretty clearly now in the bill curve, which is a dynamic that only started in the last two days,” Andrew Hollenhorst, fixed-income strategist at Citigroup Inc. in New York, said in a telephone interview. “We think it is an opportunity. It’s very unlikely that payments would actually be delayed. If you’re an investor who can take advantage of the tactical situation, we’d wait for yields to move a little bit higher in those maturities and then think about investing.”

The Treasury reached its statutory borrowing limit on Dec. 31 and is using “extraordinary” measures to pay for the government. It will lack sufficient funds to pay all its bills as early as Feb. 15, according to the Washington-based Bipartisan Policy Center.

Debt Ceiling

Treasury Secretary Timothy F. Geithner warned yesterday of severe economic hardship should Congress fail to raise the debt ceiling that lawmakers have increased or revised 79 times since 1960, including 49 times under Republican presidents. President Barack Obama vowed he won’t negotiate over raising the government’s debt ceiling even as he offered to deal on a separate track with the deficit reduction demanded by Republicans.

Short-term Treasury bill rates, as well as those for borrowing and lending government debt for one day in the repurchase-agreement market, rose to more than a two-year high in the summer of 2011 as Republicans and Democrats tried then to also push through a deal to lift the nation’s debt limit and avoid a default.

“Even though the probability of a delayed payment or an accidental default or outright default by the Treasury is still very, very, very low, people in the money markets are still behaving cautiously,” Joe Abate, a strategist at Barclays Plc in New York, said in a telephone interview. “Things for a 10-day period in 2011 got very sloppy and very ugly. I think we will see that again here because I don’t expect to see an agreement by Feb. 15.”

The one-month Treasury bill rate surged to as high as 0.183 percent on July 29, 2011, the highest since February 2009, and up from as low as negative 0.0101 percent during the first half of that year.

The average level of overnight Treasury general collateral repo rates traded through 10 a.m. New York time with ICAP Plc, the world’s largest inter-dealer broker, touched as high as 0.32 percent on Aug. 1, 2011, the highest since March 2, 2009.

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