Signs are mounting within financial markets that investor concern about the US borrowing limit is increasing, with fresh debt auctions Thursday joining other indicators in sounding the alarm.
(Bloomberg) — Signs are mounting within financial markets that investor concern about the US borrowing limit is increasing, with fresh debt auctions Thursday joining other indicators in sounding the alarm.
The US Treasury sold one-month bills at the highest-ever yield for the tenor, underscoring just how quickly the debt-ceiling landscape has shifted in the wake of Treasury Secretary Janet Yellen’s announcement that the US government could run into limitations as soon as early June.
The government on Thursday sold $50 billion of four-week securities at a record 5.84%. That’s the highest for any Treasury bill issue since 2000, data show. The new securities are scheduled to mature on June 6.
Just last week, the Treasury sold one-month securities — with a maturity date of May 30 — at 3.83% as investors rushed to scoop up paper perceived to be less impacted by a potential US default. Back then, broader market pricing suggested that the risk of non-payment was much later in the summer.
But with expectations having shifted, and the maturity on new one-month securities being a week later, that tenor now appears to be squarely in the danger zone many investors are looking to avoid.
“The optics are not great for Treasury debt when you see gap moves in auction yields,” said Subadra Rajappa, head of US interest-rate strategy at Societe Generale SA.
T-bill pricing has suggested for some time a level of increased concern stretching from June through much of the US summer, and those rates remain notably elevated compared to securities maturing in the very near term. But within that spectrum of summer-maturity securities, some dates are more concerning than others, and the focus points have sharpened markedly since Yellen’s announcement.
The yield curve of already issued bills has, for some days, pointed to elevated concern around early June as well as some other points in the calendar.
Yields on early June bills are now firmly above 5%, with some above 5.4%. May yields, by contrast are substantially lower, while those for much of July are also below 5%. There is another kink up around early August, reflecting heightened concerns around that period.
The Treasury also sold $45 billion of eight-week bills on Thursday at 5.40%. That was the highest on record since that tenor was introduced in 2018. Like the one-month security, the two-month bill is also right in the summer concern period, but not right near the date Yellen warned about.
The elevated yields on near-term T-bills are also helping to accentuate another key indicator that many observers look to as a potential recession signal — the 3-month to 10-year yield curve. Of course, there is a range of potential factors stirring concerns about an economic slump including high Federal Reserve rates, credit contraction and banking-sector turmoil. But a catastrophic default situation would undoubtedly add additional fuel to any downturn.
Meanwhile, credit default swaps on the US sovereign have also surged in recent weeks, even climbing past levels seen during the 2011 ceiling crisis.
“The idea that that we aren’t going to default is slowly breaking down,” Moody’s Analytics economist Mark Zandi said at a Senate Budget hearing.
The urgency is being heightened by the narrowing of the window to achieve some kind of political fix — even if only short term. Between now and June 1 — the date by which the Treasury has warned about — President Joe Biden and members of the House and Senate are scheduled to be in town at the same time for just seven days.
“We are in a game of chicken and it may very well blow up the economy,” Democratic Senator Jeff Merkley said Thursday.
–With assistance from Erik Wasson and Liz Capo McCormick.
(Updates throughout.)
More stories like this are available on bloomberg.com
©2023 Bloomberg L.P.