Debt-Ceiling Fear Sends Yields on At Risk T-Bills Above 7%

Default-risk concerns also appear to be affecting US equities too

(Bloomberg) — The deadlock in debt-ceiling negotiations is adding to default concern around a number soon-to-mature Treasury bills and also starting to dent investors’ appetite for risk more broadly.

Yields on securities due in early June surged Wednesday as investors steered clear of more at-risk bills, with rates on several instruments topping 7%. Bills maturing in that time frame, a window that Treasury Secretary Janet Yellen has warned about repeatedly, are seen as most at risk of non-payment if the US government exhausts its borrowing capacity.

Rates on those due June 1 and June 6 at one stage on Wednesday topped 7%, around 4 percentage points above instruments maturing May 30, while other securities in the first weeks of June also saw their yields leap.  US stocks, too, are beginning to show greater signs of concern over the standoff. The S&P 500 Index was down as much as 1% at one point on Wednesday, although increased bets on Federal Reserve tightening also contributed. The dollar — often seen as something of a haven — gained for a third straight day.

The cost of insuring US sovereign debt against default with derivatives has also risen, signaling heightened risk, and attention is also beginning to turn to the major credit-rating agencies to see how they might react if the standoff goes down to the wire.

Treasury Secretary Janet Yellen said that signs of market stress are now beginning to emerge as the federal government moves closer to running out of cash, and that the administration’s focus is on completing a debt-limit deal rather than contingency planning for a default. House Speaker Kevin McCarthy told reporters Wednesday there should not be any fear in the markets and that he still thinks Congress has time to strike an agreement.

JPMorgan Chase & Co. reckons there’s a roughly one-in-four chance that the US will hit the so-called X-date — the point at which the government runs out of debt-limit headroom — without a deal to raise the ceiling, and the odds are getting worse.

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 Treasuries. Noticeable upward distortions in particular parts of the curve tend to suggest increased concern among investors that that’s the time the US might be at risk of default. Right now that’s most prominent around early June. But it’s not just early June securities that investors are circumspect about. Even if the Treasury can make it past the June danger zone, there are still risks of a default during the US summer if no legislative fix is found.

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. Most strategists have pulled forward their baseline estimates to align more with forecasts out of Washington, although some remain hopeful that the Treasury might be able to stretch its resources until late summer.

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 fluctuates daily depending on spending, tax receipts, debt repayments and the proceeds of new borrowing. If it gets too close to zero for the Treasury’s comfort that could be a problem. The amount of money the US government has to pay its bills actually rose for three straight days, providing a modicum of respite as it seeks to eke out funding until a solution can be found to the ongoing impasse, but the broad trend has been for the total to dwindle. Focus will also be on the so-called extraordinary measures that the Treasury is using to eke out its borrowing capacity. The government has already used up more than two thirds of these accounting gimmicks and had $92 billion up its sleeve as of the middle of last week.

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 many emerging markets that have credit ratings well below that of the US.


(Updates pricing, cash balance.)

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