Debt Ceiling Anxiety Tracker: Bills Show Trader Concern Growing

(Bloomberg) -- The U.S. Treasury is likely to exhaust its current borrowing authority in less than a month and investor angst is beginning to build.

Traders are alert to the potential for market disruption should politicians in Washington fail to raise America’s so-called debt-ceiling in time, and signs of concern are showing up in short-term markets as the Treasury’s available cash pile has fallen to $173 billion, the lowest level in two years. 

While key Treasury-market industry groups have been dusting off plans developed ahead of previous debt-ceiling showdowns, some on Wall Street don’t want to take their chances and have begun shifting more of their cash into less exposed corners of the short-term funding markets. 

And with Treasury Secretary Janet Yellen pointedly commenting this week that things could come to a head by Oct. 18, traders have sharpened their focus on the prospect of a ceiling breach.

Following are some charts to help gauge just how jittery markets are getting:

Risk Premium

If the U.S. runs out of borrowing capacity, those who hold debt that’s due to be repaid shortly afterward are among those who are immediately most exposed. Investors in those particular securities are therefore demanding a premium to compensate for the risk, and that’s showing up in bill yields. All else being equal, longer-dated bills usually command a higher rate than shorter ones. But right now, those coming due between mid October and early November  -- the most likely window for a default -- have noticeably higher yields. 

Lackluster Auctions

The unwillingness of investors to hold paper maturing around the riskier dates is also showing up in the results of government auctions. Four-week bills, the most short-term securities that the government sells on a regular basis, have seen the proportion bought by so-called indirect bidders drop in recent offerings. This is a group that includes money market funds, suggesting that their appetite for paper due around late October has been waning of late. And the decrease is perhaps even more marked if you take into account the fact that the total size of these sales has also shrunk as the government navigates the ceiling issue.

A Place of Greater Safety

Of course, investors still need somewhere to park their short-term cash even if they’re avoiding certain T-bills, and that’s helping to add to blockbuster demand to place money at the Federal Reserve’s facility for reverse repurchase agreements. While the record usage of these operations has been driven in large part by a simple lack of T-bills in the market -- an issue also related to the ceiling -- a shunning of particular securities is pushing some traders into the arms of the more trusted counterparty that is the Fed. 

Dwindling Cash

Perhaps one of the most stark measures of how close America is to the edge is to look at the Treasury’s cash pile. Fueled by fiscal stimulus and Fed asset-purchase measures, the cash balance exploded to a record $1.83 trillion in July 2020, but has since shrunk to a fraction of that. A large part of that drawdown was planned -- indeed the Treasury was required to reduce its cash balance to a certain level before the ceiling was officially reinstated at the start of August. But the pile is now well below what the Treasury itself had forecast last month for the end of the third quarter. All that means that the government has less of a buffer to pay its bills if there’s a disruption in debt markets, which simply adds to the risks.

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