The fight to raise the US debt ceiling plays out in two different ways in the US bond market

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The struggle in Congress to fund the federal government and raise the US debt ceiling impacts the treasury market by nearly $ 21 trillion in two different ways.

The larger U.S. government bond market – focused on maturities from one year onwards – is essentially bewildered by what it sees as a congressional theater, even as Washington moves closer to a possible government shutdown at midnight Thursday if government funding is not approved and a possible default if the country’s debt limit is not raised in the next three weeks, analysts said.

Meanwhile, the market for bills – or short-term debt securities guaranteed by the U.S. Treasury – reflects greater concern, with some issues increasingly difficult to trade, as the Treasury will likely exhaust measures to avoid default if Congress has not acted to increase the debt limit by October 18.

On Tuesday, Treasury Secretary Janet Yellen said on October 18, her department “would be with very limited resources which would run out quickly.”

Read: What happens if the United States defaults on its debt?

“For the bond market at large, it’s fair to say that the market knows we’ve seen this movie before and the likelihood of economic disaster resulting from a government default is really, really low,” said Thomas Simons, Money Market Economist. at Jefferies LLC. “It’s more of a self-designed problem that can be solved by Congress.”

“But upstream, where supply is very low, bills that fall due on dates close to potential defaults are trading at higher yields and are very difficult to negotiate,” Simons said by phone Tuesday. “Liquidity will continue to deteriorate until we reach an agreement to raise the debt ceiling, but there should not be a sense of escalating panic by then.”

The 1-month Treasury bill rate TMUBMUSD01M,
0.065%,
for example, hit 0.0837% on Tuesday, up from 0.0406% earlier today, according to FactSet. This is the highest level since January and even a little higher than where the yield of the 1 year note TMUBMUSD01Y,
0.080%
negotiated – reflecting how limited demand for the 1 month invoice is currently. The 1 month yield was also higher than the rates on the 2, 3 and 6 month bills.

Meanwhile, Treasury yields further on the curve rose for reasons unrelated to the debt ceiling debate. The massive sell-off in US government debt was sparked by growing fears of inflation, pushing the 10-year Treasury yield further above 1.5% after briefly breaking above that level in the previous session.

On Monday, Treasury prices “fell to technical levels causing a real rush to exit among people who were long and invited people who were short again,” said portfolio manager Tom. Graff, head of fixed income for Brown Advisory in Baltimore. , which oversaw roughly $ 128 billion in client assets in June. Meanwhile, “the market is looking beyond the debt ceiling issue and assuming it gets resolved.”


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