T-bill market rocked as US debt ceiling fight drags on

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The political struggle for the US debt ceiling first spilled over to the $ 22 billion Treasury market on Friday, as investors shed short-term bills that expire as bonds fall. United States could run out of liquidity.

The yield on Treasury bills that mature October 21, three days after Treasury Secretary Janet Yellen said government funds will be depleted, rose 0.07 percentage points early Friday to reach 0.14%, according to Bloomberg business data.

Later in the day some buyers stepped in, helping to contain yield to a more modest 0.1% level.

Failure to raise the federal debt limit by Oct. 18 – when Yellen said the Treasury Department would exhaust “extraordinary measures” used to give lawmakers time to act – would put the United States in danger of missing critical payments, compromising their creditworthiness and potentially precipitating financial turmoil with soaring borrowing costs.

Yields, which move inversely to the price of a bond or bill, have also increased on other treasury bills maturing after the October 18 date, including those maturing on October 26 and October 28.

“It is very likely that it will get worse,” Mark Cabana, head of US interest rate strategy at Bank of America, said of the measures. “The markets really start to factor in more risk of late payments or technical default when you’re about two weeks away. That’s basically where we are now.

Friday’s move was prompted in part by passing the resolution to continue funding the U.S. government and avoid a shutdown on Thursday, said Bret Barker, portfolio manager at asset manager TCW. Some traders had hoped that an increase or suspension of the debt ceiling would have gone with this, which did not happen.

“You can see the tickets trading cheaper throughout late October and early November,” Barker said. “It will be played on the wire. But we are convinced that they will increase the debt ceiling.

The Treasury market, which includes more than $ 4 billion in short-term bills, was largely unscathed from the debate in Congress over raising the debt ceiling. Many investors and traders believe a deal will be reached before the United States misses its debt payments, given the political ramifications of the default.

Rating agency Fitch warned on Friday that if the debt limit was not raised in time, default risks would increase, even though its analysts believe the Treasury Department has certain measures it could use to effect payments on its debts.

“We are planning to reach the Treasury [deadline] without raising the debt limit as the main extreme risk to the American sovereign’s willingness and ability to pay, ”said Charles Seville, analyst at Fitch.

Republicans have so far refused to sign to raise the debt ceiling, pressuring Democrats to do it themselves. Democrats, meanwhile, said there was not enough time to pass a measure without opposition party support.

In this week’s hearings, Yellen advocated a two-party solution, adding that she would support the elimination of the debt ceiling altogether.

“The need to do this has nothing to do with future spending or tax plans that weren’t passed. It is necessary to pay your bills, ”she told members of the House of Representatives on Thursday. “Republicans and Democrats must share this responsibility. “

Federal Reserve Chairman Jay Powell also called on lawmakers this week to avoid default, stressing that the US central bank is limited in its ability to compensate for any resulting economic or financial damage.

A contingency plan previously launched by Fed officials in 2013 during another debt ceiling confrontation was for the central bank to buy back the defaulting Treasury debt and instead sell the securities it owns. Powell pushed back on those tactics on Tuesday, saying “these are things we really wouldn’t like to do.”

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