The focus on the debt ceiling in the US might see a replay of last year when we were greeted with an eleventh hour agreement, but markets are not taking any chances. The T-Bill curve shows pressure is being felt on the 03/06 bills, where yields are at a mid of 11bp, compared to 3.25bp mid for 02/27s and 7bp for 03/20s.
The higher yield on the March 6 bills suggests that the market views a default/delayed hiccup in Treasury payments as more likely this time around. This is the market’s best guess, but we must be cognisant that it could also simply be related to positioning, as institutions look to protect themselves via precautionary sales or limiting demand for such bills.
In October, S&P 500 and VIX did not reflect concerns over the debt ceiling, as they were confident that the Fed and Treasury would be able to control the fallout. It is too early to extrapolate the debt ceiling concerns starting to be felt in the bill market to what is currently happening in risk markets, which seem to be reacting more to worries over the global growth outlook.
The deal in October extended the deadline to this Friday (February 7), and Treasury Secretary Lew has said that extraordinary measures mean borrowing capacity will not be exhausted until the end of February.
In contrast to last year, the movements in the T-Bill market are worth watching, given the backdrop of bears being firmly in control of risk markets and given the Fed has embarked on tapering QE.