Dislocations most visible around T-bills maturing in the first half of June
(Bloomberg) — US bills that mature in early June are showing ongoing signs of concern about the risk of a government default after Treasury Secretary Janet Yellen reiterated to lawmakers that her department’s ability to avoid breaching the statutory debt ceiling via special accounting maneuvers could be exhausted around then.
The window for a resolution of the debt-ceiling standoff is clearly narrowing, with the Treasury saying last week that it had run through all but about $88 billion of its authorized extraordinary measures as of last Wednesday. The Treasury has been releasing updates on that figure each Friday for the past couple of weeks, although it did also publish numbers the day after Yellen’s last letter to Congress. The letter comes a day before another scheduled meeting on the debt cap between President Joe Biden and Speaker Kevin McCarthy, who said that ongoing talks were yielding little progress.
T-bills maturing after the potential so-called X-date have been trading with a significant yield premium because of concerns about non-payment and continued to do so on Monday, with the most notable dislocations in paper due June. At the same time, the cost of insuring US debt against non-payment has also soared in recent weeks, although the response in some other markets has thus far been more sanguine. That could change if the situation gets more fraught.
“We expect the debt showdown to stoke market volatility” even if some kind of deal is reached before June, BlackRock Investment Institute analysts wrote in a weekly commentary. “Yields for some Treasury bills maturing just after the X-date have already started to rise, but risk assets have yet to fully react. Yields for the affected Treasury bills could march higher, and volatility may keep cycling through assets if the debt ceiling is repeatedly suspended.”
Writing two weeks after her previous letter to Congressional leaders, Yellen said she would update Congress again next week as more information becomes available. As of now, the point at which the Treasury will run out of so-called extraordinary measures that are helping to keep it within the debt limit could be “a number of days or weeks later” than early June, she said.
If the so-called X-date is in fact the first week of June, the practical deadline may be as early as May 26, Brian Gardner, chief Washington policy strategist at Stifel Financial, said before the release of Yellen’s latest missive. That’s because legislators will need time to review the bill before voting and Congress is scheduled to be out of session the week after Memorial Day.
But there are many in financial markets predicting or hoping that some kind of deal will get done, in part because that’s what’s always happened, even when things have gone down to the wire. Stifel’s Gardner said the chance of a default on US Treasuries remains remote as the government should be able to prioritize bond payments.
From Washington to Wall Street, here’s what to watch to gauge how worried observers should be and when they should be concerned.
The Bills Curve
Investors have historically demanded higher yields on securities that are due to be repaid shortly after the US is seen as running out of borrowing capacity. That puts a lot of focus on the yield curve for bills — the shortest-dated Treasury securities — and any dislocations that show up. Noticeable upward distortions in particular parts of the curve tend to suggest increased concern among investors that that’s the time Uncle Sam might be at risk of default. Right now that’s most prominent around early June.
Money-market funds made a “notable shift” toward shorter-maturity Treasury bills in April, according to strategists at JPMorgan Chase & Co. Holdings of bills maturing within 30 days made up 74% of total T-bill holdings at the end of April from 43% at the end of March, according to their analysis. At the same time, bills maturing in more than 60 days declined to 9% of bill holdings from 13% the prior month, while securities in the 31- to 60-day bucket dropped to 17%, from 44%.
X-Date Predictions
Underpinning the various moves in debt markets are differing estimates about when the government might exhaust its options to fund itself — commonly referred to as the X-date. While the administration has provided guidance that it might fall short as soon as June, prognosticators across Wall Street have also been running the numbers based on government cash flows and expectations around taxes and spending. Some strategists have pulled forward their estimates to align more with forecasts out of Washington. Others, meanwhile, are staying with late-summer projections. To be sure, recent cash-flow figures from the Treasury suggest that it’s even more unclear whether the department will make it until June 15, a key tax payment day. Treasury’s latest headroom forecast suggests the low point in the department’s overall fiscal resources in the second week of June will still be above zero, but “much too close for comfort,’’ Wrightson ICAP economist Lou Crandall wrote in a note to clients.
Insuring Against Default
Beyond T-bills, one other key area to watch for insight on debt-ceiling risks is what happens in credit-default swaps for the US government. Those instruments act as insurance for investors in cases of non-payment. The cost to insure US debt is now higher than the bonds of — among others — Greece, Mexico and Brazil, which have defaulted multiple times and have credit ratings many rungs below that of the US.
Related Story: US Default Insurance Cost Eclipses Brazil, Mexico as X-Day Nears
The Cash Balance
The US government’s ability to pay its debts and meet its spending obligations ultimately comes down to whether it has enough cash, so the amount sitting in its checking account is crucial. That figure ebbs and flows from day to day depending on spending, tax receipts, debt repayments and the proceeds of new borrowing. And if it gets too close to zero for the Treasury’s comfort that could be a problem.
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Wrangling in Washington
Ultimately though, any fix will need to come from Washington. There aren’t that many days this month when both chambers of Congress are available and Biden is also scheduled to be in the US capital, meaning there isn’t a lot of time to waste to reach a deal before the X-date. Biden, McCarthy and other congressional leaders plan to meet Tuesday to discuss budget negotiations to avoid a default.
Related Story: Budget Talks Inch Forward as Debt Deadline and Biden Trip Near
(Adds Yellen latest and updates throughout.)
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