Debt-Cap Concern Spurs Nervousness About Late December T-Bills

(Bloomberg) -- Elevated yields on some Treasury bills maturing in late December are hinting at concern the U.S. will run out of borrowing capacity before the end of this year, veering toward a technical default.

The Dec. 23 bill is yielding around 0.11%, compared with 0.07% for the security that matures five days later. Yields across much of the bill curve edged higher on Tuesday after comments from Federal Reserve Chair Jerome Powell appeared to open the door for faster central bank policy tightening. But those on the Dec. 23 bill are up by 6 basis points, more than most, suggesting a potential crunch point.

So-called kinks in the bill curve tend to emerge amid risk of a possible technical default, which could happen if Congress fails to either suspend or increase the federal debt limit. The government is currently deploying so-called extraordinary measures to keep it from breaching the official limit and it is not exactly clear when these will run out, leaving investors to estimate.

The nonpartisan Congressional Budget Office on Tuesday warned that the Treasury could “run out of cash before the end of December,” echoing previous comments by Treasury Secretary Janet Yellen. While the kink in the curve was evident in Tuesday trading even before the most recent CBO report, the latest alarm bell is likely to reinforce investor worry.

“The market is getting increasingly nervous as the deadline approaches,” said Gennadiy Goldberg, a senior U.S. rates strategist at TD Securities. “But the CBO report suggesting that Treasury is likely to run out of cash by the end of December is likely to accelerate Congressional action on the issue.”

Rates on bills due Dec. 31 are also higher than surrounding maturities, but that may be more tied to apprehension by investors that it could be difficult to reinvest funds that are returned to them on the final day of the year.

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