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Treasury bill market jolted as US debt ceiling fight drags on


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The political fight over the US debt ceiling spilled into the $22tn Treasury market for the first time on Friday, as investors dumped short-term bills that mature around the time the US could run out of cash.

The yield on Treasury bills that mature on October 21, three days after the date by which Treasury secretary Janet Yellen has said the government’s funds will be exhausted, rose as much as 0.07 percentage points early on Friday to as high as 0.14 per cent, according to Bloomberg trading data.

Later in the day some buyers stepped in, helping contain the yield to a more modest 0.1 per cent.

Failure to raise the federal debt limit by October 18 — when Yellen said the Treasury department will exhaust the “extraordinary measures” used to buy time for lawmakers to act — would put the US at risk of missing critical payments, undermining its creditworthiness and potentially precipitating financial turbulence as borrowing costs spike.

Yields, which move inversely to a bond or bill’s price, also rose on other Treasury bills that mature after the October 18 date, including those due on October 26 and 28.

Line chart of Yield to maturity of Treasury bills, by maturity date (%) showing US Treasury bills hit as debt ceiling deadline looms

“It’s quite likely to get worse,” Mark Cabana, the head of US rates strategy at Bank of America, said of the moves. “Markets really start to price in more risks of delayed payment or technical default when you’re about two weeks out. That’s essentially where we are right now.”

The move on Friday was propelled in part by the passage of the continuing resolution to fund the US government and avert a shutdown on Thursday, Bret Barker, a portfolio manager with asset manager TCW, said. Some traders had held out hope that a raise or suspension to the debt ceiling would have been packaged together with that, something that did not happen.

“You can see bills trading cheaper all throughout late October and early November,” Barker said. “It is going to come down to the wire. But we’re confident they’ll raise the debt ceiling.”

The Treasury market, which includes more than $4tn worth of short-term bills, had gone largely unscathed by the debate in Congress to raise the debt ceiling. Many investors and traders believe that an agreement will be made before the US misses payments on its debt, given the political ramifications of default.

Credit rating agency Fitch warned on Friday that if the debt limit was not raised in time, the odds of default would increase, even though its analysts believe the Treasury department had some measures it could turn to in order to make payments on its debts.

“We view reaching the Treasury’s [deadline] without the debt limit having been raised as the principal tail risk to the US sovereign’s willingness and capacity to pay,” Charles Seville, an analyst with Fitch, said.

Republicans have so far refused to sign on to raising the debt limit, pressuring Democrats to do so on their own. Democrats, meanwhile, have said there is not enough time to pass a measure without support from the opposition party.

At hearings this week, Yellen urged a bipartisan solution, adding that she would support the elimination of the debt ceiling altogether.

“The need to do so has nothing to do with future spending or tax plans that haven’t been enacted. It is necessary to pay your bills,” she said to members of the House of Representatives on Thursday. “Republicans and Democrats need to share that responsibility.”

Federal Reserve chair Jay Powell also called on lawmakers this week to avert a debt default, stressing that the US central bank is limited in its abilities to offset any resulting economic or financial damage.

One contingency plan previously floated by Fed officials in 2013 during another debt-ceiling showdown was for the central bank to buy up defaulted Treasury debt and instead sell securities it owns. Powell on Tuesday pushed back on those tactics, saying “these are things that we really would not like to do”.

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