Debt ceiling concern sends Treasury yields down 6%

Continued uncertainty over whether a debt ceiling solution can come together quickly enough to avoid a government default pushed yields on Treasury notes due between early and mid-June toward 6% on Tuesday.

According to Bloomberg data, the yield on Treasury bills due on June 6 touched this level before settling around 5.997%. Meanwhile, the interest rate on Treasury bills due June 8 was at 5.905% as of Tuesday afternoon.

In addition, one-year Treasury bills issued in June 2022 that mature on June 15 were yielding 6.141%, although analysts said that was likely affected by a government auction on Tuesday. That yield of 6.141% is currently the highest rate for any government commitment due within two weeks after the so-called X date on June 1st — when Treasury Secretary Janet Yellen said the government may be unable to pay all of its bills if no action is taken on the cap. Debt.

The Treasury market is where concern about the debt ceiling was the most, and Tuesday brought wild trading as investors wondered if the government would have to miss payments after June 1st. Breakup – one in which returns ranged from 2.924% on government liabilities due May 30th to 6.141% on a one-year bill due June 15th.

The higher the yield on the Treasury obligation, the more investors will claim to offset the risk of holding that bill. Yields also rise when investors sell or walk away from the underlying maturity. Tuesday’s moves suggested that investors and traders are taking into account at least some of the risks that the government could overshoot without resolving the debt ceiling.

Right now, the market regards bills payable between June 6 and June 15 as being “the most at risk of delinquency and nobody wants to own them,” said Lawrence Gillum, senior fixed income analyst in Charlotte, NC at LPL Financial. .

“Ultimately, the markets expect something to get done, but the money managers who have to own these T-bills aren’t taking any chances,” he said over the phone.

For now, the broader financial market appears relatively more confident that a debt ceiling agreement can be reached by June 1, a day after both President Joe Biden and House Speaker Kevin McCarthy called the talks “productive” on Monday.

Although all three major US stock indices

DJIA

SPX

COMP

Non-Treasury yields were lower in the afternoon, they were either higher or little changed on Tuesday as the theme of higher interest rates dragged on for longer, as traders looked past the debt ceiling drama, resilience of the US economy and inflation.

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One of the financial markets’ favorite indicators of an impending US recession – the difference between the 2- and 10-year Treasury yields – has been continually flipping since July 5, 2022. This is the longest such streak since May 1980, and yet no recession has occurred. It has been announced so far by the only important referees, those at the National Bureau of Economic Research.

On Tuesday, federal funds futures traders priced in a 27% chance of another quarter-point rate hike by the central bank in June, which would raise the main policy target to between 5.25%-5.5%. They also factored in a slight 6% chance of another rate hike of the same size in July.

Gillum and Greg Varanello, head of US interest rates at AmeriVet Securities in New York, said they see little chance that a debt ceiling will not be agreed by June 1. They said bill yields had risen dramatically in a manner reminiscent of the crisis of confidence in the UK bond market last year. It would also make it more difficult for the Fed to raise interest rates on June 14th and potentially lead to a higher quality trade in long-term Treasurys as stocks sell off.

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As of Tuesday, the T-Bill market was “definitely showing some signs of strain, there’s no question about that,” Varanello said by phone. Meanwhile, “the economy is doing better than the recessionary narrative,” even after the recent turmoil in regional banks, and a move toward 4% in the 10-year rate “cannot be ruled out.” However, that could change quickly depending on the outcome of the debt ceiling debate.

Getting something done on the debt ceiling by June 1, Varanello said, “is going to be a challenge.” The risk of default is “small but not a zero percent probability”, as is the potential for chaos if negotiators get too close to the wire and create a period of confusion in the treasury market.

“At the very least, there would be fairly severe economic damage” from a default or any confusion, “that could be messy” and “you will see that impact on risky assets,” he said.