Senate Deal Shifts Angst Out Curve: Debt Ceiling Anxiety Tracker
(Bloomberg) -- Rate-market investors pushed back their expectations when the U.S. government might breach its borrowing limit for a couple of months, mirroring the short-term agreement reached by Senate leaders.
The yield on the Dec. 16 maturity traded as high as 0.085%, which is above surrounding securities and back from highs for bills due later this month just a day ago. Investors are still struggling to reprice risk as it remains unclear whether Treasury will be able to replenish its cash balance at the Fed and whether the department would be allowed to replenish the government retirement funds that it tapped for extraordinary measures.
This was reflected in the Treasury’s four-week bill auction Thursday as investors flocked to the shorter tenor now that the debt-ceiling fight has been delayed, at least until December.
The plan reached between Senate Majority Leader Chuck Schumer and GOP counterpart Mitch McConnell would raise the statutory debt ceiling by $480 billion, according to a Senate aide. The amount would allow the Treasury to meet obligations through Dec. 3, the same day that the current short-term government spending bill runs out. Schumer set up a procedural vote and another for final passage after Republicans agreed to expedite the process, though McConnell was still working on gathering enough Republican votes to move the debt ceiling bill forward.
Meanwhile, the Treasury’s cash pile plunged to $95.9 billion as of Oct. 6, the lowest since December 2017, according to data published Wednesday. And given the lack of details on the Senate leadership’s agreement, it’s unclear how much the Treasury will be able to boost its cash balance or utilize extraordinary measures during the short-term extension.
If the U.S. runs out of borrowing capacity, debt maturing immediately afterward might not be repaid on time. Investors in those securities are therefore demanding compensation for the risk in the form of higher bill yields.
Buyers Bowing Out
The unwillingness of investors to hold paper maturing around the riskier dates is also showing up in the results of government auctions. Eight-week bills, the second-shortest securities that the government sells on a regular basis, have seen the proportion bought by so-called indirect bidders drop after Congress signaled a short-term resolution to the debt ceiling. At Thursday’s eight-week offering, indirect bidders were awarded just 33.7% of the $25 billion sale, the lowest since Sept. 2. By comparison, they were awarded 39.9% of the four-week offering, well above the 5.5% share at last week’s offering, which was the lowest since October 2015.
“This is the worst possible time for auctions,” said Jefferies economist Thomas Simons after the auctions. “No vote yet, sketchy details, good luck.”
Full Speed Ahead for Reverse Repo
Meanwhile, investors in need of an alternative to certain T-bills are flocking to the Federal Reserve’s facility for reverse repurchase agreements. That’s adding to demand created by T-bill supply cuts made in an effort to keep the debt load under the ceiling. Usage of the facility increased to a record high a week ago.
One of the starkest proxies for debt-ceiling risk is the Treasury’s cash pile. Inflated by fiscal stimulus and Fed asset purchases, the cash balance exploded to a record $1.83 trillion in July 2020, but has since dwindled to around $95.9 billion, the smallest since December 2017. A large part of that drawdown was mandated by the reinstatement of the debt ceiling at the start of August. But the pile is now well below what the Treasury itself had forecast for the end of the third quarter. It still remains unclear by how much Treasury will be able to boost its cash buffer under the short-term agreement reached Thursday.
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