Debt Ceiling Standoff Hits Bond Market

The U.S. Department of the Treasury in Washington, D.C. ENLARGE
The U.S. Department of the Treasury in Washington, D.C. Photo: Andrew Harrer/Bloomberg News

Concerns that the U.S. could run out of money next month rippled through the bond market Friday, marking a return to the worries of previous debt-ceiling standoffs.

The yield on the U.S. Treasury bill maturing on Nov. 12 rose to 0.036% Friday, the highest since Aug. 19 and up from 0.005% Thursday. Prices fall as their yields rise.

While yields remain ultralow, the trading is a reversal for a security whose yield for the past few weeks has often been below zero, reflecting outsize demand from money-market funds and other investors and a decline in bill issuance by the U.S. government.

Congressional leaders appear increasingly unlikely to reach any kind of budget deal in time to ease passage of an increase in the federal borrowing limit needed by Nov. 3. Failure to reach a budget agreement by early next month would put pressure on Republican leaders and President Barack Obama over the terms of a debt-limit increase.

Treasury Secretary Jacob Lew on Thursday said the U.S. will exhaust emergency cash-management measures by then and risks running out of cash shortly thereafter if the federal borrowing limit isn’t raised by Congress.

Friday’s trading marked a repeat of debt-ceiling showdowns in 2011 and 2013. Both times, yields on bills maturing around the debt-ceiling deadline spiked before falling once legislators agreed to increase the national borrowing limit.

“The default risk is almost zero,’’ said Stanley Sun, interest-rates strategist at Nomura Securities International in New York. “We have seen this movie many times before. The question here is how long the suspense is going to be this time.”

Bills are government debt that matures in a few weeks to a year. Buyers such as corporations use bills as a safe place to stash money that they don’t want to tie down for longer. Tighter regulations after the financial crisis have raised demand for bills among money-market funds and banks.

Few believe the U.S. would default on its debt, which is the world’s safest and most liquid, or easily tradeable, debt instrument. Analysts say the issue is that a political stalemate could delay payments from the Treasury, a reason why investors typically cut exposure to bills maturing around the deadline to avoid unwanted hassles, especially for investors who need the payments during that period.

On Friday, the yield on the bill maturing on Nov. 5 also rose, along with the one due on Nov. 12, while yields on other bills after these two maturities remain below zero or around zero. Some analysts and traders said the ripples are likely to be felt in other maturities if the standoff continues.

But analysts say the rise in bill yields may be more contained, thanks to tighter regulations taking effect in 2016 on money-market funds that are prompting those funds to purchase short-term U.S. debt.

Investors have faced a shrinking pool of new bill offerings since the start of September, as the debt ceiling derailed the Treasury’s plan in the summer aiming to increase sales of bills to meet growing demand.

The Treasury sold $ 5 billion in one-month bills this past week, the smallest amount since the Treasury started selling this maturity in 2001. The size has slid from $ 40 billion offered each week in August.

Write to Min Zeng at [email protected] Markets

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