World's Most Liquid Securities Market Starts to Get Gummed Up

  • U.S. delays two-year note auction amid congressional standoff
  • Investors call it threat tactic, worry about further delays

The impasse over the U.S. debt limit is gumming up the machinery of the world’s most liquid securities market.

The U.S. Treasury Department on Thursday said it will postpone an auction of two-year notes because the sale might end up breaching the debt cap, the first delay related to the ceiling in more than a decade. Eight days earlier, the Treasury held off for a half hour on releasing results from the smallest four-week bill auction since 2001 to verify that rules which limit individual bid sizes were followed.

With 12 days left until Treasury Secretary Jacob J. Lew says the government will exhaust measures to stay under the limit, more disruptions may not be far behind. While the Treasury said political considerations didn’t factor into Thursday’s action, some investors saw it as a way for the Obama administration to press the Republican-controlled Congress to increase the debt ceiling.

“This is really a debacle,” said Deborah Cunningham, chief investment officer for global money markets at Federated Investors Inc., one of the largest providers of money-market mutual funds. “It’s the third time it has happened in five years, which is just ridiculous.” She said that the latest action may be a “threat tactic” by the Treasury.

The Treasury said it will postpone the two-year note auction scheduled for Tuesday as a congressional standoff over the debt limit constricts the nation’s borrowing. While no additional delays are planned, the Treasury will maintain flexibility with future issuances, said a Treasury official who asked not to be identified.

Analysts are also concerned the regular sales of three-, 10- and 30-year debt, slated for next month, may be affected. The Treasury expects Congress will act in time to avoid any disruptions to the auctions, known as the quarterly refunding, the official said.

Schedule Disturbed

The delay disturbs the otherwise regular and predictable debt issuance-schedule that the Treasury uses to secure the lowest possible financing costs for taxpayers. With $12.9 trillion in marketable securities, the U.S. is considered the world’s most reliable debt issuer. The last time an auction was delayed due to the borrowing limit was in November 2004, the Treasury said.

“The next step would be for the Treasury to look at canceling other auction cycles,” said Aaron Kohli, a fixed-income strategist at Bank of Montreal, one of 22 primary dealers that trade with the U.S. central bank. “The refunding will be the focus as it is announced in early November. That will be more dicey as to how much of that they would be willing to delay. That is a bigger deal.”

Lew on Wednesday reiterated that the government on Nov. 3 will exhaust the tools it’s using to stay under the borrowing cap. He urged Congress to increase the U.S. debt limit, calling it irresponsible for lawmakers to use political brinkmanship that could jeopardize the government’s record of honoring its obligations.

House Republicans discussed options for raising the debt limit at a closed-door meeting on Wednesday as party members remain deadlocked over internal differences. A House vote on a bill raising the debt limit is unlikely this week and remains unscheduled, a Republican aide said Thursday.

House Speaker John Boehner “understands that Congress must pass legislation to address the debt ceiling,” spokeswoman Emily Schillinger said in an e-mailed statement on Thursday. “He is working with his colleagues on a path forward.”

House Minority Leader Nancy Pelosi called the cancellation of the Treasury auction “very consequential” and said the chamber must act by Friday on debt-ceiling legislation to give the Senate enough time to act by the Nov. 3 deadline. 

‘Chaos’ Calendar

In comments to reporters in Washington on Thursday, the California Democrat accused Republicans of engaging in a “calendar of chaos” and said that the nation’s borrowing authority shouldn’t be negotiable or subject to conditions. She said that she had yet to see signs that Republicans had any plans for a clean debt-limit measure. 

Lew has been talking to lawmakers and Congressional leadership about the debt ceiling regularly, including this week, another Treasury official said. 

The yield on the two-year Treasury note slid after the announcement, as it means less supply than had been expected in this sector. The yield fell two basis points, or 0.02 percentage point, to 0.61 percent on Thursday, according to Bloomberg Bond Trader data. It was little changed as of 7:34 a.m. London time on Friday.

“Treasury believes that postponing the auction for the 2-year note poses less risk for market functioning than postponing the 5-year or 7-year note offering,” the department said. “Once the debt limit impasse is resolved, Treasury will announce a rescheduling of the 2-year note auction.”

The deadlock over the debt ceiling has already increased federal government borrowing costs, reduced the Treasury bill supply, and increased the operational risk associated with holding less cash on hand, the Treasury said.

“Treasury respectfully urges Congress to increase the debt ceiling as soon as possible,” the department said. “The creditworthiness of the United States is not a bargaining chip, and Congress should address this matter without controversy or brinkmanship.”

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