Bond Traders Brace for March Madness as U.S. Debt Cap Returns

(Bloomberg) -- Treasury traders are bracing for their own outbreak of March madness, with a plethora of risks on the radar, including the coming reinstatement of the U.S. debt ceiling.

March 1 marks the final day of the borrowing cap’s suspension, and the limit’s return will start the countdown until America runs out of so-called extraordinary measures to keep the government funded. Friday is also the official deadline for an increase in U.S. tariffs on goods from China, although progress in negotiations indicates that could well be delayed.

Even before that, the market has to navigate several obstacles, in particular Congressional testimony from Federal Reserve Chairman Jerome Powell -- who could provide more color on the central bank’s dovish pivot -- and U.S. Trade Representative Robert Lighthizer.

While the first months of 2019 have had their fair share of market-moving headlines, the Fed’s recent shift away from an aggressive tightening trajectory has helped to quell fluctuations in Treasuries. The Bank of America Merrill Lynch MOVE Index -- a gauge of anticipated swings -- has fallen to less than 47 from more than 68 in December. And the 10-year yield, currently around 2.65 percent and within 12 basis points of its January low, has held in a narrow range for much of this year.

Bond Traders Brace for March Madness as U.S. Debt Cap Returns

“It will be an interesting week,” said Zachary Griffiths, a rates strategist at Wells Fargo Securities, pointing to Friday’s deadline for both the debt ceiling and tariffs. “And anytime Chair Powell is speaking, there is always risk that things can be more volatile if the market latches onto certain phrases.”

On the debt-ceiling issue, there are some signs of wariness in the short-term interest-rate market. Traders expect that U.S. Treasury Secretary Steven Mnuchin will, as he has in the past, draw upon extraordinary measures to keep the government within its statutory borrowing capacity for some time beyond March 1.

But those will run out eventually if Congress fails to either lift or suspend the debt cap, and some estimate that the exhaustion point could come around August. That in turn could affect demand for securities that mature right around that time, and yields on bills maturing then are already showing some dislocation.

There has also been some softness in demand at six-month bill offerings of late, and that may once again be tested when the government sells debt at that tenor on Monday, kicking off a big issuance week that has at least $226 billion in Treasuries on the auction block.

That said, the exact time frame for when borrowing capacity might be exhausted remains fluid, especially because the administration’s tax overhaul has created additional uncertainty around Internal Revenue Service receipts. And in the meantime, there are plenty of risks up close to occupy investors’ attention.

Scott Skyrm, vice president at Curvature Securities, said he’s clearly focused on the coming month.

“There’s a good chance something happens in March,” he said. “There could be a big economic number that goes one way or another, or maybe it’s something in China. Or people are gearing up for some type of Fed announcement like a change in the QE roll-off.”

What to Watch

  • Powell’s Congressional testimony is the highlight among central bank speakers
    • Feb. 25: Fed Vice Chair Richard Clarida speaks in Dallas
    • Feb. 26: Powell testifies before Senate Banking Committee
    • Feb. 27: Powell speaks before House Financial Services panel
    • Feb. 28: Clarida speaks in Washington; Atlanta Fed’s Raphael Bostic speaks at banking conference; Philadelphia Fed’s Patrick Harker speaks on economic outlook; Dallas Fed’s Robert Kaplan speaks in San Antonio; Cleveland Fed’s Loretta Mester speaks in St. Louis; Powell speaks at a conference in New York
    • March 1: Bostic speaks at economic policy conference
  • For economic data, the gross domestic product report for the fourth quarter will be key:
    • Feb. 25: Chicago Fed activity index; wholesale inventories; Dallas Fed manufacturing index
    • Feb. 26: Housing starts and building permits; FHFA house price index; S&P CoreLogic home prices; Conference Board consumer confidence; Richmond Fed manufacturing index
    • Feb. 27: MBA mortgage applications; trade balance; wholesale and retail inventories; pending home sales; factory orders; durable goods orders
    • Feb. 28: Jobless claims; 4Q GDP report; Chicago purchasing managers index; Bloomberg consumer comfort gauge; Kansas City Fed manufacturing activity
    • March 1: Personal income and spending report, including PCE core measures; Markit manufacturing PMI; ISM manufacturing gauge; University of Michigan consumer confidence index; vehicle sales
  • Here’s the schedule for Treasury auctions:
    • Feb. 25: $48 billion of 3-month bills; $39 billion of 6-month bills; $40 billion 2-year notes and $41 billion of 5-year notes
    • Feb. 26: $26 billion of 52-week bills; $32 billion of 7-year notes
    • Feb. 28: 4-week bills; 8-week bills

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