Signs of Debt-Ceiling Risk Are Showing Up in the Treasuries MarketBy
Traders wary of potential for increased political brinkmanship
Tie-up could echo 2013, when bill rates spiked amid shutdown
Traders have begun offloading Treasury bills maturing in early March amid concern efforts to extend America’s borrowing capacity may become conflated with measures to set spending priorities.
Congressional leaders faced with the expiration of current spending authorizations at the end of the week released a stopgap spending bill to keep the government operating through Feb. 16. That would bring the next deadline to avert a government shutdown perilously close to the Treasury’s so-called drop-dead-date to avoid a default, which experts forecast may be as soon as early March. Yields on T-bills maturing March 1 and March 8 held steady Wednesday after rising by as much as six basis points Tuesday.
Back in 2013, when wrangling over the debt limit coincided with a potential government shutdown, bill rates soared by as much as 33 basis points after legislators couldn’t pass a short-term spending resolution. Congress eventually struck a last-minute deal to raise the debt cap, but not before taking a notch out of economic growth and delaying the Federal Reserve from tapering its bond purchases.
“The times when we’ve had the worst debt-ceiling situations are when they coincide with the funding issue,” said Jefferies money-market economist Thomas Simons. “If you can wrap up a giant political football with even more brinkmanship, then why not.”
Wrightson ICAP economist Lou Crandall on Tuesday pulled forward his forecast for when America will exhaust it’s borrowing capacity to early March, saying the Treasury’s latest monthly statement of the public debt shows “much less remaining headroom” at the end of December than initially projected. That may limit the amount the government can borrow in the coming weeks, potentially forcing the Treasury to cut short-term bill auctions further. It has already scaled back the size of its one-month bill sale, lowering it by $5 billion this week to $45 billion.
JPMorgan Chase & Co. projects that the Treasury’s cash buffer and extraordinary measures used to create borrowing headroom will be depleted no later than March 1, fixed-income strategists led by Jay Barry said in a note Tuesday.
When it comes to the debt-limit, “there’s a sense of benign neglect until it reaches the point where somebody can’t take it anymore,” Jefferies’ Simons said. “It’s going to get sticky and ugly.”