Investors Shy Away From T-Bill Auction With Debt Ceiling Looming

  • Three-month bill auction attracts lowest demand in eight years
  • Bills mature when U.S. projected to reach borrowing capacity

The Treasury Department got a clear message from investors that they’re starting to get concerned another showdown over the U.S. debt ceiling may get ugly.

The government’s auction Monday of $39 billion of three-month bills attracted the lowest demand of any other sale of the securities since June 2009. The bills, which mature around when the Treasury is estimated to run out of money unless lawmakers agree to extend the statutory limit on the nation’s borrowing, were sold at a rate of 1.18 percent, the highest since October 2008.

The uncertainty “led to a buyers’ strike in the three-month sector,” with investors demanding the securities at a yield two basis points higher than where the issue was trading before the sale,  Thomas Simons, a money market economist at Jefferies LLC, said in a note.

The auction’s bid-to-cover ratio, which compares the number of bids received to the amount accepted, plunged to 2.87, equaling the lowest since June 2009, versus a six-auction average of 3.14. Indirect bidders took 34.8 percent, the largest takedown since July 3, though combined with the tail it’s not a strong indicator of buyside demand, Simons added.

Three-month bills are yielding more than six-month securities as investors shift into other tenors on the Treasury bill curve. The curve inverted on July 19 and at around negative 6 basis points, it’s the flattest it has been since February 2008. 

Even with concern showing up in the bill curve, the mania surrounding the debt ceiling may be overblown, Simons said. There’s an “extremely minimal risk of an actual default occurring near the maturity date of these bills,” he said.

The most recent major debt-ceiling showdown, which was accompanied by a government shutdown in October 2013, had a relatively limited impact on markets aside from some moves in bill rates. The political fight that led to the 2011 debt limit saga prompted S&P Global Ratings to revoke the U.S.’s AAA credit rating.

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