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Bond Market's Debt-Ceiling Alarm Bell Is Ringing Loud and Clear

  • Investors demand higher yield to hold early March T-bills
  • Feb. 6 four-week bill sale may show angst on drop-dead date

In the $2 trillion Treasury-bill market, where the U.S. government turns for short-term funding, investors are showing they’re plenty nervous about the approaching deadline to raise the nation’s debt ceiling.

With Treasury expected to exhaust its borrowing authority as early as the first half of March, a four-week bill sale on Tuesday will serve as the latest gauge of investor anxiety. There’s growing concern that the impasse over the debt limit will become entangled with efforts to keep the government open. Current federal funding expires Feb. 8, and the Republican-led Congress has been working on a stopgap measure to extend that into late March.

Treasury has deployed extraordinary measures to stay under the debt cap since it was reinstated in early December, but investors are wary. The new securities mature March 8, around when the Congressional Budget Office expects Treasury to run out of room. Traders are asking for higher yields to own previously issued bills maturing March 8. What’s more, an auction last week of bills due March 1 drew the weakest demand since May.

“People are kind of getting skeptical of March 8 bills,” said Joseph Abate, a strategist at Barclays Capital in New York. “You might argue that the March 1 bill isn’t necessarily vulnerable to payment delay because the Treasury probably has sufficient resources to meet outflows and thus might be able to last until” March 5.

Deadline Duel

Treasury has placed the drop-dead date around the end of February. But investors are leaning toward the projection from the nonpartisan CBO, which said last week that the U.S. may run the risk of default without a debt-ceiling increase in the first half of March.

After the Jan. 30 auction of bills maturing March 1, the rate on those securities was higher than debt due a week later. Since then, the rate on debt expiring March 8 has climbed to 1.40 percent, exceeding that on bills due a week later.

The debt-ceiling showdown is roiling the bills market in another way: Treasury has been shrinking bill auctions. This week’s four-week sale, the size of which will be announced Monday, could be at least $10 billion smaller than last week’s, according to Abate.

That’s because Treasury needs to make room for the $30 billion 70-day cash-management bill it plans to sell in conjunction with the four-week obligation. The additional borrowing gives Treasury cash on hand and allows it to issue less debt that matures around the potential debt-cap deadline.

So far, Republican leaders’ plan for keeping the government open doesn’t include a move to lift the cap. As long as that’s the case, dislocations in the bills market may persist.

“They reset the clock on extraordinary measures, but Congress hasn’t moved on the debt ceiling since Dec. 8,” Abate said. “They’re running out of maneuvering room.”

What to Watch Next Week

  • Treasury offers its first coupon auctions since announcing size increases:
    • Feb. 5: $48 billion of three-month bills and $42 billion of six-month bills
    • Feb. 6: Four-week bills, plus a $30 billion 70-day cash-management bill and $26 billion of three-year notes
    • Feb. 7: $24 billion of 10-year notes
    • Feb. 8: $16 billion of 30-year bonds
  • At the Federal Reserve, Jerome Powell is set to be sworn in as chair on Feb. 5, while some of his colleagues have speeches planned:
    • Feb. 6: St. Louis Fed’s James Bullard speaks on the U.S. economy
    • Feb. 7: Appearances by Dallas Fed’s Robert Kaplan, Chicago Fed’s Charles Evans, New York Fed’s William Dudley and San Francisco Fed’s John Williams
    • Feb. 8: Philadelphia Fed’s Patrick Harker, Minneapolis Fed’s Neel Kashkari and Kansas City Fed’s Esther George round out the week
  • The calendar for economic indicators includes the following releases:
    • Feb. 5: Markit U.S. services PMI; ISM non-manufacturing
    • Feb. 6: Trade balance; JOLTS job openings
    • Feb. 7: MBA mortgage applications; consumer credit
    • Feb. 8: Initial jobless claims; Bloomberg consumer comfort
    • Feb. 9: Wholesale inventories
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