Worries about whether a U.S. debt-ceiling resolution can be reached were reflected in volatile trading of short-term government bills, with investors and traders bailing on the two-month maturity on Friday after a fresh warning from U.S. Treasury Secretary Janet Yellen.
Investors and traders sold off the 2-month Treasury bill, pushing the corresponding rate up 29.5 basis points to 4.834% from Thursday’s close of 4.539%, based on 3 p.m. Eastern time data from Tradeweb. Yields rise whenever the underlying maturity sells off, and the size of Friday’s move points to rising nervousness that the government may run out of money in June.
Treasury bills are the epicenter of the financial market’s debt-ceiling concerns because of the possibility that the government could default on its short-term obligations.
A meeting scheduled to take place on Friday between President Joe Biden and congressional leaders was postponed until next week, though the delay was couched as a “positive development” by one source. And on Friday, Yellen told Bloomberg Television that “we have to default on some obligation” if Congress fails to lift the $31.4 trillion statutory borrowing limit, “whether it’s Treasurys or payments to Social Security recipients.”
Sentiment behind the volatility in the two-month bill has swung from one extreme to another in just a matter of days. On Thursday, investors and traders were still operating under the assumption that a debt-ceiling resolution could eventually be reached, leading to greater demand for the short-dated bill and sending its yield down almost half a percentage point to its lowest level since March.
Friday’s reversal reflects “nervous selling on the fear that these bills won’t get paid out if the debt ceiling doesn’t get resolved,” said Tom di Galoma, managing director and co-head of global rates trading for global financial services firm BTIG.
“Yesterday, there was hope that the debt ceiling would get resolved,” he said via phone. “Now, it looks like that could at least be delayed or go down to the wire. My opinion is that it will get resolved. I don’t think the U.S. government will default and these things are always decided at the last minute. That’s probably what’s going to happen this time.”
On Friday, the nonpartisan Congressional Budget Office provided an update, saying there’s a significant risk that the government will no longer be able to pay all of its obligations “at some point in the first two weeks of June” unless the federal borrowing limit is raised. That’s in line with Yellen’s June 1 forecast for the so-called X-date, when the Treasury department may be unable to satisfy all obligations.
Debt-ceiling nervousness hasn’t yet spilled over into the broader Treasury market, where other yields were relatively more contained on Friday, or the stock market, where all three major U.S. indexes
finished with losses for the day after a weak consumer-sentiment reading revived recession fears.
“Hardly anyone thinks a default is a good idea because it would cause a panic and would be a lose-lose for Republicans and Democrats alike,” said Eric Diton, the Boca Raton, Fla.-based president and managing director at The Wealth Alliance, which oversees $1.6 billion in managed and brokerage assets.