It’s Worth Paying Attention to This T-Bill Auction Next Week

Updated on
  • Three-month auction Dec. 26 stands out in abbreviated week
  • Bills mature when U.S. is projected to reach borrowing limit

As Treasuries traders look ahead to a holiday-shortened week devoid of significant U.S. economic data, an auction of three-month bills is shaping up as a key event.

While the Republican-led Congress managed to pass a sweeping tax-overhaul package this week, lawmakers show no sign of moving toward an agreement to raise the nation’s borrowing limit. With Treasury expected to breach the ceiling as soon as late March, the $45 billion bill sale on Dec. 26 will serve as a fresh gauge of investor anxiety about the impasse.

Treasury has deployed a series of extraordinary measures to stay under the cap since it was reinstated in early December. But T-bill investors may still be wary given questions over what’s known as the debt ceiling’s drop-dead date. The new securities mature March 29, within the Congressional Budget Office’s late-March to early-April window for when Treasury will exhaust the extra capacity it’s using to keep below the $20.5 trillion limit.

The late-December bill auctions “speak volumes to investors being cautious as to when the potential drop-dead date will be,” said Justin Mandeville, a fund manager at Invesco, which oversees $938 billion. “We saw it back in July when we had concerns about the October bills.”

Kink Doesn’t Lie

This time, a kink has already emerged in the bill curve around securities maturing in late March. For several days after the Dec. 18 auction of bills maturing March 22, the rate on these securities was higher than debt maturing a week later. Since then, the rate on securities expiring March 29 has climbed to 1.35 percent, exceeding those on bills due the following week. Typically, shorter maturities should have lower yields.

Buyers were hesitant in July as well, during the previous debt-ceiling showdown. At the time, the Congressional Budget Office and Wall Street analysts expected Treasury to exhaust its borrowing authority about three months later. 

At the government’s July 24 auction, Treasury sold $39 billion of three-month bills at 1.18 percent, then the highest rate since 2008. A measure of demand for the sale matched the lowest for the maturity since 2009.

Congress wound up passing a three-month debt-ceiling suspension Sept. 8, weeks before Treasury Secretary Steven Mnuchin estimated the government would run out of cash.

This time, there’s still a chance the issue could be resolved without going down to the wire.

However, while lawmakers hammered out a spending bill this week to keep the government open through Jan. 19, they didn’t include a provision to lift or suspend the debt ceiling. The longer a resolution remains at the bottom of Congress’s to-do list, the larger the T-bill dislocations could grow.

What to Watch Next Week

  • Treasury brings its final coupon auctions of the year, in addition to three bill sales on one day:
    • Dec. 26: $45 billion of three-month bills, $39 billion of six-month bills, $50 billion of four-week bills and $26 billion of two-year notes
    • Dec. 27: $13 billion reopening of two-year floating-rate notes, and $34 billion of five-year notes
    • Dec. 28: $28 billion of seven-year notes
  • The following economic indicators are scheduled for release:
    • Dec. 26: S&P CoreLogic Case-Shiller home price index; Richmond Fed manufacturing; Dallas Fed manufacturing
    • Dec. 27: Conference Board consumer confidence; pending home sales
    • Dec. 28: Advance goods trade balance; wholesale inventories; retail inventories; initial jobless claims; Chicago purchasing manager index; Bloomberg consumer comfort
  • Sifma recommends an early bond-market close of 2 p.m. ET on Dec. 29, ahead of New Year’s Day
(Updates yield on bills maturing March 29.)
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