Tag: U.S. 3 Month Treasury Bill

Fed could be the Grinch who 'stole' cash earning 5%. What a Powell pivot means for investors.

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Yields on 3-month
BX:TMUBMUSD03M
and 6-month
BX:TMUBMUSD06M
Treasury bills have been seeing yields north of 5% since March when Silicon Valley Bank’s collapse ignited fears of a broader instability in the U.S. banking sector from rapid-fire Fed rate hikes.

Six months later, the Fed, in its final meeting of the year, opted to keep its policy rate unchanged at 5.25% to 5.5%, a 22-year high, but Powell also finally signaled that enough was likely enough, and that a policy pivot to interest rate cuts was likely next year.

Importantly, the central bank chair also said he doesn’t want to make the mistake of keeping borrowing costs too high for too long. Powell’s comments helped lift the Dow Jones Industrial Average
DJIA
above 37,000 for the first time ever on Wednesday, while the blue-chip index on Friday scored a third record close in a row.

“People were really shocked by Powell’s comments,” said Robert Tipp, chief investment strategist, at PGIM Fixed Income. Rather than dampen rate-cut exuberance building in markets, Powell instead opened the door to rate cuts by midyear, he said.

New York Fed President John Williams on Friday tried to temper speculation about rate cuts, but as Tipp argued, Williams also affirmed the central bank’s new “dot plot” reflecting a path to lower rates.

“Eventually, you end up with a lower fed-funds rate,” Tipp said in an interview. The risk is that cuts come suddenly, and can erase 5% yields on T-bills, money-market funds and other “cash-like” investments in the blink of an eye.

Swift pace of Fed cuts

When the Fed cut rates in the past 30 years it has been swift about it, often bringing them down quickly.

Fed rate-cutting cycles since the ’90s trace the sharp pullback also seen in 3-month T-bill rates, as shown below. They fell to about 1% from 6.5% after the early 2000 dot-com stock bust. They also dropped to almost zero from 5% in the teeth of the global financial crisis in 2008, and raced back down to a bottom during the COVID crisis in 2020.

Rates on 3-month Treasury bills dropped suddenly in past Fed rate-cutting cycles

FRED data

“I don’t think we are moving, in any way, back to a zero interest-rate world,” said Tim Horan, chief investment officer fixed income at Chilton Trust. “We are going to still be in a world where real interest rates matter.”

Burt Horan also said the market has reacted to Powell’s pivot signal by “partying on,” pointing to stocks that were back to record territory and benchmark 10-year Treasury yield’s
BX:TMUBMUSD10Y
that has dropped from a 5% peak in October to 3.927% Friday, the lowest yield in about five months.

“The question now, in my mind,” Horan said, is how does the Fed orchestrate a pivot to rate cuts if financial conditions continue to loosen meanwhile.

“When they begin, the are going to continue with rate cuts,” said Horan, a former Fed staffer. With that, he expects the Fed to remain very cautious before pulling the trigger on the first cut of the cycle.

“What we are witnessing,” he said, “is a repositioning for that.”

Pivoting on the pivot

The most recent data for money-market funds shows a shift, even if temporary, out of “cash-like” assets.

The rush into money-market funds, which continued to attract record levels of assets this year after the failure of Silicon Valley Bank, fell in the past week by about $11.6 billion to roughly $5.9 trillion through Dec. 13, according to the Investment Company Institute.

Investors also pulled about $2.6 billion out of short and intermediate government and Treasury fixed income exchange-traded funds in the past week, according to the latest LSEG Lipper data.

Tipp at PGIM Fixed Income said he expects to see another “ping pong” year in long-term yields, akin to the volatility of 2023, with the 10-year yield likely to hinge on economic data, and what it means for the Fed as it works on the last leg of getting inflation down to its 2% annual target.

“The big driver in bonds is going to be the yield,” Tipp said. “If you are extending duration in bonds, you have a lot more assurance of earning an income stream over people who stay in cash.”

Molly McGown, U.S. rates strategist at TD Securities, said that economic data will continue to be a driving force in signaling if the Fed’s first rate cut of this cycle happens sooner or later.

With that backdrop, she expects next Friday’s reading of the personal-consumption expenditures price index, or PCE, for November to be a focus for markets, especially with Wall Street likely to be more sparsely staffed in the final week before the Christmas holiday.

The PCE is the Fed’s preferred inflation gauge, and it eased to a 3% annual rate in October from 3.4% a month before, but still sits above the Fed’s 2% annual target.

“Our view is that the Fed will hold rates at these levels in first half of 2024, before starting cutting rates in second half and 2025,” said Sid Vaidya, U.S. Wealth Chief Investment Strategist at TD Wealth.

U.S. housing data due on Monday, Tuesday and Wednesday of next week also will be a focus for investors, particularly with 30-year fixed mortgage rate falling below 7% for the first time since August.

The major U.S. stock indexes logged a seventh straight week of gains. The Dow advanced 2.9% for the week, while the S&P 500
SPX
gained 2.5%, ending 1.6% away from its Jan. 3, 2022 record close, according to Dow Jones Market Data.

The Nasdaq Composite Index
COMP
advanced 2.9% for the week and the small-cap Russell 2000 index
RUT
outperformed, gaining 5.6% for the week.

Read: Russell 2000 on pace for best month versus S&P 500 in nearly 3 years

Year Ahead: The VIX says stocks are ‘reliably in a bull market’ heading into 2024. Here’s how to read it.

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December 17, 2023
How ransomware attack on ICBC rattled the Treasury market and shook up a 30-year bond auction

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It was a trading day unlike any other for traders in the $25 trillion Treasury market, with a 30-year bond auction seen as having been partially undermined by a cyberattack on the U.S. unit of a Chinese bank.

In recapping Treasury’s poorly received $24 billion bond auction on Thursday, traders said the weaker-than-expected results likely had at least something to do with this week’s ransomware hit on the American arm of Industrial & Commercial Bank of China, known as ICBC. That attack reportedly caused disruptions across the market and had some impact on liquidity, with the Financial Times citing unnamed sources as saying hedge funds and asset managers were forced to reroute trades.

Traders were grappling on Friday to answer the question of what created the sudden lack of interest at the auction, which went so badly that it also shook up U.S. stock investors. Thursday’s sale was the worst since November 2021, based on the extent to which primary dealers were forced to step in and pick up the slack in demand, one trader said. And it reinforced a recent pattern of weak auctions for the 30-year bond that may not bode well for future sales of that long-dated maturity.

It’s possible that bonds simply “look much less attractive” following a recent “explosive rally” since late October, according to Charlie McElligott, a cross-asset macro strategist at Nomura Securities in New York. However, “this might be the case of ‘more than meets the eye’ to this ‘ugly auction evidencing low demand for duration’ story,” he wrote in a note.

“One dynamic that makes yesterday’s ugly auction results murky was the ICBC cyberattack described across various financial media, which gunked-up anybody who clears UST trades through them, and made it so that many dealers were then likely unable to trade with those clients until resolved, on account of unsettled trades which weren’t able to be matched,” McElligott said.

Adding to Thursday’s uncertainty was another random event. Federal Reserve Chairman Jerome Powell appeared on stage in an International Monetary Fund panel, was interrupted by a climate protester, and then uttered a seven-letter expletive that could be heard on the event’s livestream.

Powell’s policy-related remarks, which indicated the central bank might take further action to control inflation, “didn’t help things and kind of spooked people again,” said John Farawell, head of municipal trading at New York bond underwriter Roosevelt & Cross.

Read: Fed’s Powell Made Cryptic Comments. How He’s Guiding the Market.

On Friday, the Treasury market found stabilization as buyers returned to segments of government debt in a sign that calm was being restored. A rush of buying was seen on the 30-year bond
BX:TMUBMUSD30Y,
sending its yield down to 4.733% and to a third straight weekly decline.

Meanwhile, Bloomberg News reported that the repercussions of the ICBC cyberattack included an inability to deliver U.S. debt that was being pledged as collateral. ICBC’s U.S. unit was forced to rely on a messenger carrying a USB stick across Manhattan to complete disrupted trades, according to the news service, which also described Thursday’s $24 billion 30-year bond auction as one of the worst in a decade.

The ICBC attack “might have had a dramatic impact on the auction. I don’t know how much, but I also can’t imagine it didn’t,” said Tom di Galoma, co-head of global rates trading for BTIG in New York. “When people see that there are trade-settlement issues, there’s a willingness to back off and that’s exactly what happened yesterday. Institutional accounts were saying, ‘We don’t know who is settling this trade.’ If the cyberattack hadn’t happened, I think the auction would have gone a lot better.”

Ben Emons, a senior portfolio manager and head of fixed income for NewEdge Wealth in New York, said that once the Treasury market got upended by the ICBC cyberattack, the bad auction, and the interruption during Powell’s appearance, liquidity on U.S. government debt “was, for a moment, a dark matter.”

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November 10, 2023
How stock-market investors can ride out a ‘fear cycle’ as S&P 500, Nasdaq fall into correction

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Many people like to feel at least a little bit of fright.

That has been the whole point of Halloween for ages. The spooky traditions might even be a sort of hedge, a way to limit carnage should darker days lurk around the corner.

Where it gets trickier is when fear impacts a nest egg, retirement fund or portfolio holdings. And fear of looming mayhem has been higher in October, with a sharp selloff causing the S&P 500 index
SPX
to break below the 4,200 level, landing it in a correction on Friday. It also joined the Nasdaq Composite Index in falling at least 10% from a summer peak.

In addition, a brutal bond-market rout has pushed the 10-year and 30-year Treasury yields
BX:TMUBMUSD10Y
up dramatically, with both recently dancing around the 5% level, which can drive up borrowing costs for the U.S. economy and cause havoc in financial markets.

“Round numbers matter,” said Rich Steinberg, chief market strategist at The Colony Group, which has $20 billion in assets under management. He said the backdrop has investors trying to figure out “where to put money” and wanting to know “where can we hide?”

“When you get into a fear cycle, the dynamics can get out of whack with reality,” Steinberg said. He thinks investors won’t go wrong earning roughly 5.5% on shorter term risk-free Treasurys, while penciling in stock prices they like.

“That’s where investors really get rewarded over the long-term,” he said, granted they have enough liquidity to ride out what could be elongated patches of volatility.

Increasingly, investor worries tie back to U.S. government spending, with the Treasury Department early next expected to release an estimated $1.5 trillion borrowing need to accommodate a large budget deficit. That would unleash even more Treasury supply into an unsettled market, and potentially strain the plumbing of financial markets.

Higher U.S. bond yields threaten to make it more expensive for the federal government to service its debt load, but they also can be prohibitive for companies, sparking layoffs and defaults.

Fed decisions, yields

The Federal Reserve is expected to hold its policy interest rates steady on Wednesday following its two-day meeting, keeping the rate at a 22-year high in the 5.25%-5.5% range.

The real fireworks, however, often appear during Fed Chairman Jerome Powell’s afternoon press conference following each rate decision.

“I firmly believe they are done for good,” said Bryce Doty, a senior portfolio manager at Sit Investment Associates, of Fed hikes in this cycle, which he notes should set up bond funds for a banner 2024, after two rough years, given today’s higher starting yields.

Yet, Doty also sees two “wild cards” that could rattle markets. Heavy Treasury debt issuance could overwhelm liquidity in the marketplace, causing yields to go up higher and potentially force the Fed to restart its bond-buying program, he said.

War abroad also could expand, including with the Israel-Hamas conflict, which could spark a flight to quality and push down U.S. bond yields.

With that backdrop, Doty suggests adding duration in bonds
BX:TMUBMUSD03M
as longer-term yields rise above short-term yields, and the so-called Treasury yield curve gets steeper. “This is the time,” he said. Investors should “keep marching” out on the curve as it steepens.

“Yields, in my mind, have been the main challenge for the equity market,” said Keith Lerner, chief markets strategist at Truist Advisory Services, while noting that stocks have been wobbly since the 10-year Treasury yield topped 4% in July.

Lerner also said the near 17% drop in the powerful “Magnificent Seven” stocks, while notable, isn’t as bad as in some other S&P 500 index sectors, like real estate, were the retrenchment is closer to 20%.

“We’ve had a pretty good reset,” he said, adding that lower stock prices provide investors with “somewhat better compensation” for the uncertainties ahead.

“This is one of the most challenging investment environments we’ve seen in a long time,” said Cameron Brandt, director of research at EPFR, which tracks fund flows across asset classes.

With that backdrop, he expects investors to keep more dry powder on hand through the end of this year than in the past.

The Dow Jones Industrial Average
DJIA
shed 2.1% for the week and closed at its lowest level since the March banking crisis. The S&P 500 lost 2.5% for the week and the Nasdaq Composite fell 2.6% for the week.

Another big item on the calendar for next week, beyond the Treasury borrowing announcement and Fed decision Wednesday is the Labor Department’s October jobs report due Friday.

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October 29, 2023
Why strategists see 10-year Treasury yield breaching 5% despite Friday’s pullback

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The 10-year Treasury yield continued to pull back from 5% on Friday after moving tantalizingly close to surpassing that level in the previous session.

The yield touched 5% at 5:02 p.m. Eastern time on Thursday, only to drift back down, according to Tradeweb data. It ended Friday’s New York session down by 6.3 basis points at 4.924%.

Rising Middle East tensions gave way to renewed safe-haven demand in government debt on Friday that not only sent the 10-year yield
BX:TMUBMUSD10Y
lower, but dragged down rates on everything from 3-month Treasury bills
BX:TMUBMUSD03M
to the 30-year bond
BX:TMUBMUSD30Y.

Investors were trying to catch the proverbial falling knife by taking advantage of a cheaper 10-year Treasury note, the product of recent selloffs. Analysts warn that it’s difficult to have much short-term conviction in catching that knife, however, given the likelihood that the selloff could return.

One big reason is the onslaught of new supply from the U.S. Treasury as the result of the government’s growing borrowing needs, which is raising the risk that investors will keep demanding more compensation to hold long-dated debt to maturity.

On Oct. 30 and Nov. 1, which is the same day as the Federal Reserve’s next policy decision, Treasury is expected to provide updated guidance on its borrowing needs and auction sizes. Treasury’s refunding announcement could even upstage the Federal Open Market Committee — creating “fertile ground for a continuation of the selloff in Treasuries,” said BMO Capital Markets rates strategists Ian Lyngen and Ben Jeffery.

Over the next several weeks, “it becomes much easier to envision a surge in Treasury yields in anticipation of the upcoming coupon supply,” they wrote in a note on Friday. While the 10-year yield has stopped shy of 5%, “we continue to expect this milestone will be reached shortly.”

Stock-market investors have been focused on the prospects of a 5% 10-year yield because such a level would dent the appeal of equities and make government debt a more attractive investment by comparison.

Read: Why stock-market investors are fixa t ed on 5% as 10-year Treasury yield nears key threshold

As of Friday, the 10-year yield, used as the benchmark on everything from mortgages to student and auto loans, has jumped 163.9 basis points from its 52-week low of almost 3.29% reached on April 5. The 10-year yield hasn’t ended the New York session above 5% since July 19, 2007.

Meanwhile, all three major stock indexes
DJIA

SPX

COMP
ended the day lower as the prospects of a widening conflict in the Middle East triggered a flight-to-safety trade into Treasurys.

Taking a step back, a 5% 10-year yield would imply that a Goldilocks-scenario of a U.S. economy — one that’s neither too hot or too cold, and able to sustain moderate growth — “is here to stay for a decade,” or that the Fed’s main interest-rate target needs to be materially higher on average over the next decade, according to BMO’s Lyngen and Jeffery. One of the biggest questions facing policy makers is whether the economy might be moving into a new stage in which even higher interest rates down the road could be required to cool demand and activity.

Though BMO Capital Markets is biased toward lower yields into the weekend given the absence of major economic data on Friday, technical indicators “continue to favor higher rates in the near-term,” and “our conviction that 5% will ultimately be traded through has grown.”

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October 20, 2023
‘Banks fail. It’s OK,’ says former FDIC chair Sheila Bair.

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Higher interest rates may be painful in the short term, but banks, savers and the financial ecosystem will be better off in the long run, said Sheila Bair, former chair of the Federal Deposit Insurance Corp.

“When money is free, you squander it,” Bair said in an interview with MarketWatch. “It’s like anything. If it doesn’t cost you anything, you’re going to value it less. And we’ve had free money for quite some time now.”

Bair, who led the FDIC from 2006 to 2011, caused a stir recently in criticizing “moonshots,” the crypto industry and “useless innovations” like Bored Ape NFTs, which proliferated because of speculation and near-zero interest rates.

Her main message has been that the path to higher rates, while potentially “tricky,” ultimately will lead to a more stable financial system, where “truly promising innovations will attract capital” and where savers can actually save.

Former FDIC Chair Sheila Bair was dubbed “the little guy’s protector in chief” by Time Magazine in the wake of the subprime mortgage crisis.

Bair sat down for an interview with Barron’s Live, MarketWatch edition, to talk about the ripple effects of higher rates, what could trigger another financial crisis and why more regional banks sitting on unrealized losses could fail in the wake of Silicon Valley Bank’s collapse in March.

“We probably will have more bank failures,” Bair said. “But you know what? Banks fail. It’s OK. The system goes on. It’s important for people to understand that households stay below the insured deposit caps.”

The FDIC insures bank deposits up to $250,000 per account. It also has overseen 565 bank failures since 2001.

“I know borrowing costs are going up, but your rewards for saving it are going up too,” she said. “I think that’s a very good thing.”

However, Bair isn’t focused only on money traps and pitfalls for grown-ups. She also has two new picture books coming out that aim to explain big financial themes to young readers, including where easy-money ways, speculation and inflation come from.

“One thing that I’ve learned from the kids is to not ask them what a loan is, because when I did that, a little hand when up, and she said: ‘That’s when you’re by yourself,’” Bair said.

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October 11, 2023
A recession could be nine months away, according to this telltale gauge

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The roughly $25 trillion Treasury market first began flashing this telltale sign that a U.S. recession likely lurks on the horizon almost a year ago, according to Bespoke Investment Group.

It was late October of 2022 when the 3-month Treasury yield BX:TMUBMUSD03M first eclipsed the 10-year Treasury yield BX:TMUBMUSD10Y, resulting in an “inversion” of a key part of the yield curve that’s been a reliable predictor of past recessions.

Where…

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September 6, 2023
What’s at stake for stock and bond investors in second half of 2023

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There’s a lot riding for stock and bond investors in the second half of the year, with the biggest question centered around whether the idea of “immaculate disinflation” can come fully to fruition.

The term refers to the notion that inflation might meaningfully dissipate from here, without a significant uptick in U.S. unemployment or a major recession. It’s considered to be the perfect scenario for investors and policy makers, who want inflation back down to their 2% target, and one in which the Federal Reserve’s main policy rate target wouldn’t need to go much higher from its current level between 5%-5.25%.

What makes the path ahead so tricky is that core readings that represent the purest reads on inflation are proving to be stubborn and it isn’t clear whether they’ll turn meaningfully lower, fast. If they don’t, that would likely put pressure on central bankers to keep up their inflation fight and has the potential to drive up interest-rate expectations, as well as Treasury yields. Though the bond market has come around to the fact there won’t likely be any rate cuts by the Fed soon, it still isn’t completely on board with the idea of higher rates for longer — which, in turn, is helping to support equities for now.

“The problem for the disinflation people or believers is that the core readings continue to come in too high,” said Jeffrey Cleveland, director and chief economist at Payden & Rygel, a Los Angeles-based investment management firm that oversees $148.9 billion in assets.

Friday’s core reading from the Fed’s favorite inflation gauge — known as the PCE — was 0.3% for the month of May, and has been at or above that mark for six straight months.

Via phone, Cleveland said his firm expects the monthly core PCE reading to end the year above 0.3%, but “you need monthly core PCE readings to be 0.1% or 0.2% to see meaningful disinflation.” If inflation surprises to the upside, “the whole Treasury curve moves up, with the 2-year rate most susceptible,” which would likely dent the performance of stocks.

Cleveland said he expects the policy-sensitive 2-year Treasury yield BX:TMUBMUSD02Y to get back to 5% by December — a level that was last seen in March.

The first six months of this year have turned out to be great for U.S. equities, with the Nasdaq-100
NDX,
+1.63%
on track for its best first-half performance on record, as investors came around to the idea that the economy is resilient enough to absorb higher rates. The unemployment rate stood at 3.7% as of May as the U.S. added a shockingly large number of jobs, while annual core readings from the consumer-price index and PCE index came in at 5.3% and 4.6%, respectively, for May.

Read: How stocks and every other major asset have performed in first half of 2023 — and over the last 18 months

Meanwhile, the benchmark 10-year yield
TMUBMUSD10Y,
3.812%,
which reflects investors’ long-term U.S. outlook, has remained relatively contained near 3.75% for months as robust U.S. data rolled in, accompanied by signs of overall inflation easing when waning gas and food prices are factored in.

Data released this week reaffirmed that the U.S. economy and labor market are holding up, despite 5 percentage points of Fed rate hikes since March 2022. With policy makers signaling two more hikes may be on the way starting in July, the risk is that the economy continues to prove resistant to policy makers’ actions and requires even more tightening.

“Not only is the U.S. economy continuing to prove resilient in the face of significantly tighter monetary policy, but it also appears the starting point of the economy for 2023 was even higher than previously anticipated with the consumer proving to be an even stronger force across the first three months,” said Stifel, Nicolaus & Co. economists Lindsey Piegza and Lauren Henderson, in a note this week.

Via phone, Henderson said her Chicago-based firm isn’t buying into the “immaculate disinflation” theory yet and thinks inflation “is proving stickier and more persistent than many expected.”

Stifel, which updates its forecasts on a quarterly basis, is standing by its year-end expectations for the 2- and 10-year Treasury yields
TMUBMUSD10Y,
3.812%
to be at 4.65% and 3.45%, respectively, she said. That’s below the current levels for those rates because Stifel economists foresee a short, shallow recession “sometime in the fourth quarter or beyond,” as policy makers push the fed-funds rate target up to 5.75% by year-end and stay there through 2024, according to Henderson.

Inside the market for fixings, or derivatives-like instruments in which bets can be made on upcoming consumer-price index reports, traders have been coalescing around the view that the annual headline CPI rate is likely to start falling toward 2% this year. They even see the core CPI reading dropping to roughly 2.5% annually and to 0.2% monthly, in relatively quick fashion.

However, one big name has a warning. Former New York Fed President Bill Dudley said inflation could easily go higher than his estimated 2.5% long-term average, and that the 10-year Treasury yield might even go above his “conservative” estimate of 4.5%.

On Friday, financial markets were focused on the positive aspects of the PCE report, with all three major U.S. stock indexes
DJIA,
+0.97%

SPX,
+1.31%

COMP,
+1.49%
higher in afternoon trading. Meanwhile, 3-month
TMUBMUSD03M,
5.320%
through 30-year Treasury yields
TMUBMUSD30Y,
3.854%
all moved lower.

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June 30, 2023
A debt-ceiling deal will spark a new worry: Who will buy the deluge of Treasury bills?

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When the U.S. debt-ceiling fight finally is resolved, the Treasury is expected to unleash a flood of bill issuance to help refill its coffers run low by the protracted standoff in Washington, D.C., over the government’s borrowing limit.

Treasury bills are debt issued by the U.S. government that mature in four to 52 weeks. New bill issuance could reach about $1.4 trillion through the end of 2023, with roughly $1 trillion flooding the market before the end of August, according to an estimate from BofA Global strategists.

They expect the deluge through August to be about five times the supply of an average three-month stretch in years before the pandemic.

“The good news is that we have a high degree of confidence around who is going to buy it,” said Mark Cabana, rates strategist at BofA Global, in a phone interview with MarketWatch. “The bad news is that it’s not going to be at current levels. Things have to cheapen.”

Cabana sees a key buyer of bill supply unleashed by a debt-ceiling deal in money-market funds, which have climbed to nearly $5.4 trillion in assets managed since the regional banking crisis erupted in March (see chart).

So people who yanked billions of dollars in deposits from banks after the collapse of Silicon Valley Bank in March and parked them in money-market funds could end up playing an encore performance in this year’s debt-ceiling drama.

Money-market funds swell since March, topping $5 trillion in assets

BofA Global

Related: Money-market funds swell to record $5.4 trillion as savers pull money from bank deposits

$2 trillion at Fed repo facility

Money-market funds have been the main reason why at least $2 trillion consistently sits overnight at the Federal Reserve’s reverse repo facility. The program was last offering a roughly 5% rate, a level Cabana said new Treasury bills might need to exceed by about 10-20 basis points.

“It’s an unintended consequence of a debt-ceiling deal getting done,” said George Catrambone, head of fixed income Americas at DWS Group, about market expectations for heavy short-term Treasury bill issuance, but he also expects money-market funds, foreign buyers and other institutions auctions to continue as buyers in the market.

“There’s always buyers. It’s a question of price.”

President Joe Biden and House Speaker Kevin McCarthy, R-Calif. met Monday to talk about potential ways to raise the $31.4 trillion borrowing limit and to avoid a “doomsday” scenario in financial markets if the U.S. defaults. As talks resumed Wednesday, McCarthy said, “I think we can make progress today.”

Congress has struck deals each time U.S. public debt has exceeded its debt ceiling in the past, including by suspending it eight times since 2016 (see chart).

In the past when the U.S. debt-limit has been violated, Congress extended or suspended it

Refinitive, RiverFront

That doesn’t mean financial markets have been sitting by idly. The 1-month Treasury yield
TMUBMUSD01M,
5.616%
rose to 5.6% on Wednesday, while the 3-month yield
TMUBMUSD03M,
5.350%
was 5.3%, according to FactSet. Bill maturing around the “X-date,” which could come as soon as June 1, have even higher yields.

Read: Debt-ceiling angst sends Treasury bill yields toward 6%

“Those are obviously pretty heady yields,” Catrambone said. “But it also exemplifies the market having to price in potential market disruptions in the month of June,” even though his team, like many in financial markets, expect that eventually “cooler heads will prevail” in Washington as the debt-ceiling standoff heads down to the wire.

Stocks were lower Wednesday, with the Dow Jones Industrial Average
DJIA,
-0.75%
off almost 300 points, or 0.9%, on pace for a fourth day in a row of losses, according to FactSet. The S&P 500 index
SPX,
-0.83%
was off 0.9% and the Nasdaq Composite Index was down 0.9%.

How the money ran out

The Treasury in January hit its borrowing limit and began operating under “extraordinary measures” to avoid a default.

Cash balances at the Treasury Department have since dwindled to less than $100 billion, according to economists at Jefferies. Barclays strategists estimate its cash balance may fall below $50 billion between June 5-15.

“Basically, we are just draining our cash account to fund operations while we wait to figure out the debt ceiling,” said Lindsay Rosner, senior portfolio manager at PGIM Fixed Income.

But when the battle over the debt limit ends in a resolution, she expects longer-dated Treasury yields to increase, as haven buying on fears of potentially a full U.S. government default and a credit rating downgrade will have been taken off the table.

“The Armageddon, whatever small probability people were pricing in of catastrophe, remove that,” she said. “And that means the worst economic outcome has been removed.”

That’s also a reason why Rosner has been avoiding ultrashort Treasurys in the eye of the debt-ceiling fight in favor of 2, 3 or 4-year bonds offering some of the highest yields in years.

“We’re being afforded good yield, good spread, a couple of years out the curve,” she said. “Play that game.”

Read next: How will the Fed react to the debt ceiling breach? Here are some plays in the playbook.

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May 23, 2023