Bond Market Braces for Final Round of Debt-Limit Fight

  • Investors continue to shun early October bills in danger zone
  • Lawmakers push back on coupling debt ceiling with Harvey aid

Members of Congress return from summer recess Tuesday with the eyes of bond traders squarely upon them. Among their pressing tasks: increase America’s borrowing authority and prevent an unprecedented default.

Investors have already been shunning Treasury bills that come due in early October, just in case there’s no solution by the Sept. 29 deadline that Treasury Secretary Steven Mnuchin has deemed “critical” for Congress to act. That’s even as he and other members of the Republican leadership have reiterated that they will undoubtedly raise the debt ceiling. 

Come Tuesday, the time for talk is over, and the time for action begins.

Political pundits say a viable solution could come from President Donald Trump convincing lawmakers to attach an increase in the debt limit to an emergency aid package for the victims of Hurricane Harvey. That could be a tough sell to some House Republicans, who are likely to vote only for the disaster relief funding. In either case, traders are wary of the political gamesmanship that’s become all too familiar around the debt ceiling.

“The idea that fiscal conservatives in Congress get a bill that includes a debt-ceiling increase and adds on disaster relief makes it a bitter pill for them to swallow,” said Blake Gwinn, strategist at NatWest Markets in Stamford, Connecticut. “Politicians aren’t going to like feeling pressured to vote ‘yes’ on disaster relief when it’s shoved down their throats.”

Market angst has percolated for weeks leading up to lawmakers’ return to Washington. It’s poised to get worse as the days remaining to raise the debt ceiling dwindle. The White House is said to want to extend the debt limit long enough to move back the specter of a U.S. default until after Congress can address funding for the full federal fiscal year and the Trump administration’s tax-overhaul efforts.

Rates on Treasury bills maturing Oct. 5, one of the maturities most vulnerable to a failed debt-ceiling increase, rose last week to 1.21 percent from 1.12 percent a week earlier. Bills that come due on Oct. 12, which could also be at risk, have a rate of 1.16 percent.

To put it simply, the October maturities have become “hot potatoes” in the $1.7 trillion T-bill market, said Mark Cabana, head of U.S. short rates strategy at Bank of America Corp.

“I don’t know how willing the Republican majority will be to add the debt limit to a Harvey relief bill,” Cabana said in a telephone interview. At the same time, “not coupling the two would just further complicate the situation and just provide another thing that needs to be dealt with in an already packed legislative schedule.”

What to Watch

  • Treasury has a full auction slate on Sept. 5, issuing $39 billion of three-month bills, $33 billion of six-month bills, $20 billion of four-week bills and $25 billion of eight-day cash management bills
    • Most-watched will be the four-week bill auction, since its maturity will fall just after Mnuchin’s debt-ceiling deadline
  • Federal Reserve officials are speaking throughout the week after hardly making a peep since the Jackson Hole symposium; traders will watch for signals on the path of monetary policy after August job gains slowed from the pace of recent months and wage growth disappointed
    • On Sept. 5: Fed Governor Brainard, Minneapolis Fed’s Kashkari and Dallas Fed’s Kaplan
    • Sept. 6: Fed releases Beige Book, showing activity through several regions of the country
    • Sept. 7: Cleveland Fed’s Mester, New York Fed’s Dudley and Kansas City Fed’s George
    • Sept. 8: Philadelphia Fed’s Harker
  • Economic data mostly second-tier after week that included PCE and payrolls
    • Sept. 5: July factory orders, durable goods orders and capital goods orders
    • Sept. 6: Markit services and composite PMI, ISM non-manufacturing composite, trade balance and MBA mortgage applications
    • Ending the week will be jobless claims, nonfarm productivity and Bloomberg consumer comfort index on Sept. 7, and wholesale inventories and trade sales on Sept. 8
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