Debt-Cap Jitters Return to Treasuries as Yellen Narrows Timing
(Bloomberg) -- Investors are beginning to demand more yield to hold the U.S. government’s shortest-maturity debt, perceived to be at risk of delayed repayment if the debt ceiling isn’t suspended or raised in the coming few weeks.
The yield on the Dec. 15 maturity climbed as much as 2.8 basis points to 0.083%, with most bills maturing earlier and later yielding less. Investors have been relatively sanguine about potential default risks given the uncertainty of the timing. Some strategists have identified a so-called x-date around the beginning of 2022 while others are focused on the end the year.
Treasury Secretary Janet Yellen on Tuesday renewed her call for Congress to boost or suspend the debt ceiling and warned that without such measures the department may have insufficient resources to continue to finance the government’s operations beyond Dec. 15. Should that happen, some securities due to be repaid around that date could technically default if new debt can’t be sold to refund them, a possibility that’s showing up in the form of slightly higher yields for the most at-risk bills.
Congress last month agreed to temporarily increase the debt ceiling by $480 billion. The Treasury quickly used much of that room to issue short-dated debt to boost its cash balance and replenish the extraordinary measures it had been using when the cap first took effect in August. Since then, the department has used some $176 billion of around $369 billion in available extraordinary measures as of Nov. 10, according to the Monday release from the Treasury.
Complicating matters, the Biden administration’s recently enacted infrastructure legislation requires the Treasury to immediately credit the Highway Trust Fund with $118 billion of nonmarketable securities. Yellen said the payment, which will consume borrowing authority under the debt ceiling, would be made by Dec. 15.
Debt-ceiling dysfunction is exacerbating distortions in dollar funding markets, where yields have been depressed by the abundance of cash chasing a shrinking pool of assets. Despite the Federal Reserve having set in motion plans to reduce the pace of monthly asset purchases that it’s been undertaking, the ongoing program combined with a long-running drawdown of the Treasury’s cash account keep adding reserves to the system, while on the asset side, bill supply has been reduced to slow the march toward the debt ceiling.
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