Debt Ceiling Dramatics Make for Strange Treasury Bill Offering
(Bloomberg) -- The latest Treasury bill auctions signaled that some investors are starting to demand more yield to hold the shortest-maturity debt, perceived to be at risk of political gamesmanship over increasing the debt ceiling next month.
The Treasury sold $10 billion of four-week bills at a yield of 0.11%, the highest since July 2020. While indirect bidders -- a group of investors that includes money-market funds -- were awarded less than 20% of the offering, direct bidders took a record 41.9%. By comparison, the department’s $25 billion eight-week offering drew a yield of 0.045%.
Investors had been sanguine about any potential for default after passage of a temporary $480 billion debt-limit increase last month. There was renewed anxiety this week after Treasury Secretary Janet Yellen on Tuesday urged Congress to boost or suspend the debt ceiling, warning that without such measures the department may have insufficient resources to continue to finance the government’s operations beyond Dec. 15.
“The December 21 maturity date is firmly in the debt ceiling danger zone so traditional buyside investors turned away,” Jefferies economists Thomas Simons and Aneta Markowska wrote in a note to clients. “The auction generated a 41.9% direct takedown. Someone clearly isn’t worried about default risk.”
Investors who are turning away from bills that are maturing near the debt ceiling deadline have found a haven in the Federal Reserve’s facility for overnight reverse repurchase agreements. Seventy-four counterparties on Thursday parked $1.584 trillion, the second-highest on record, and just off the all-time high of $1.605 trillion reached on Sept. 30.
Still, the exact timing of the so-called x-date of a possible U.S. default remains unclear. Barclays estimates the Treasury may have enough cash and borrowing authority to make it through the end of December and into early January without an increase in the debt limit. Complicating things, however, is the fact the department faces large payments in the second half of next month.
Senate Majority Leader Chuck Schumer and Minority Leader Mitch McConnell met on Thursday to ensure a smoother path to addressing the debt limit following a clash last month that had started to rattle the markets.
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