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Treasury bill yields start to price in debt ceiling uncertainty

·2 min read

By Karen Brettell

Aug 11 (Reuters) - Some U.S. Treasury bill yields are beginning to reflect concerns that lawmakers may wait until the last minute to increase or suspend the debt ceiling, after a budget blueprint failed to include a provision to resolve the issue.

The Democratic-controlled U.S. Senate on Tuesday passed a massive infrastructure bill and immediately kicked off debate on a $3.5 trillion spending blueprint, though it did not include an increase or suspension of the debt limit.

“The fact that the debt limit was not addressed in the budget blueprint really sets up for quite a contentious battle over another increase,” said Jonathan Cohn, a trading strategist at Credit Suisse in New York. As a result, “we are now starting to see some cheapening in bills in that late October, early November area.”

The government’s two-year debt ceiling suspension expired last month. The Treasury is expected to be able to get by until October or later by using extraordinary measures.

Dozens of Republican senators on Tuesday signed a pledge not to vote to raise the nation's borrowing capability when it is exhausted in the autumn.

“It just makes it more likely that we get towards the eleventh hour scenario,” said Tom Simons, a money market economist at Jefferies in New York. “When that happens, there tends to be a kink in the yield curve.”

Investors are likely to avoid bills that mature soon after the Treasury is likely to run out of cash, even if the chances of a default are small. That means that yields on those issues can rise above longer-dated debt yields, which is unusual in the Treasury yield curve.

So far moves are small, and short-dated yields are largely pinned around the 5 basis point level, which is the rate investors can earn from borrowing Treasuries from the Federal Reserve overnight as part of its reverse repurchase agreement facility.

Bills maturing in late October and early November, however, when the Treasury is most likely to face funding pressure, have crept higher and are yielding around 5.5 basis points. Those maturing in late September, by comparison, yield around 4.7 basis points and those due in December, after the issue is expected to be addressed, yield from 4.7 to 5.3 basis points.

(Reporting by Karen Brettell; Editing by Steve Orlofsky)