Published: May 23, 2023 at 2:04 pm ET
Ongoing uncertainty about whether a debt ceiling solution can come quickly enough to avoid a sovereign default pushed government bond yields maturing between early and mid-June to 6% on Tuesday. According to Bloomberg data, the June 6 Treasury yield reached this level before settling at around 5.997%. Meanwhile, the yield on government bonds maturing on June 8 stood at 5.905% as of Tuesday afternoon. Additionally, the one-year Treasury bond maturing on June 15, issued in June 2022, returned 6.141%, although analysts said that would likely be impacted by a government auction on Tuesday. That 6.141%…
Ongoing uncertainty about whether a debt ceiling solution can come quickly enough to avoid a sovereign default pushed government bond yields maturing between early and mid-June to 6% on Tuesday.
According to Bloomberg data, the June 6 Treasury yield reached this level before settling at around 5.997%. Meanwhile, the yield on government bonds maturing on June 8 stood at 5.905% as of Tuesday afternoon.
Additionally, the one-year Treasury bond maturing on June 15, issued in June 2022, returned 6.141%, although analysts said that would likely be impacted by a government auction on Tuesday. That 6.141% yield is currently the highest of any government bond yielded within two weeks of what is known as the debt ceiling.
The Treasury bill market has been hit hardest by fears over the debt ceiling, with wild trading seen on Tuesday as investors questioned whether the government will be forced to suspend payments after June 1. Currently, the Treasury bill market is in a state of crisis dislocation — a time when yields have ranged from just 2.924% for the Treasury note due May 30 to 6.141% for the one-year note due June 15.
The higher the yield on a government bond, the more investors are demanding compensation for the risk involved in holding that bond. Yields also increase when investors sell or stay away from the underlying maturity. Tuesday’s moves suggest that investors and traders are pricing in at least some risk that the government could pass the X-date with no debt ceiling decision.
Currently, the market considers debt securities maturing between June 6 and June 15 to be “the most at risk of late payment and nobody wants to own them,” said Lawrence Gillum, the Charlotte, North Carolina-based chief fixed income strategist at LPL Financial.
“Ultimately, markets expect something to happen, but money managers who have to own these government bonds are not taking any chances,” he said over the phone.
For now, the broader financial market seems relatively more confident that an agreement on the debt ceiling can be reached by June 1, a day after President Joe Biden and House Speaker Kevin McCarthy both described Monday’s talks as “productive.” had.
However, all three major US stock indices
DJIA
SPX
COMP
were lower in afternoon trade, non-T-bill government bond yields were either higher or little changed on Tuesday as a longer-term higher interest rate theme took hold and traders looked beyond the debt ceiling drama and the resilience of the US economy and inflation.
Read: “Survival of the Fittest”: How Pandemic Era Changes Can Turn the Market’s Recession Narrative on Its Head
One of the financial market’s most popular indicators of looming US recessions – the difference between the yields on two- and ten-year Treasury bonds – has been steadily reversing since July 5, 2022. It’s the longest such spell since May 1980, and yet there hasn’t been a recession. That has so far been declared by the only arbiters that matter: those of the National Bureau of Economic Research.
On Tuesday, Fed fund futures traders priced in a 27% chance of another quarter-point rate hike by the central bank in June, taking the key interest rate target to 5.25% to 5.5%. They also factored in a slim 6% probability of another rate hike of a similar magnitude in July.
Gillum and Greg Faranello, heads of US interest rates at AmeriVet Securities in New York, said they see a slim chance that no agreement on the debt ceiling will be reached by June 1. In such a scenario, the Treasury market would be thrown into “disarray,” with US banknote yields soaring in a way reminiscent of last year’s crisis of confidence in the UK bond market, they said. This would also make it more difficult for the Fed to hike rates on June 14 and likely lead to a flight to quality trading in longer-dated Treasuries as equities sell off.
See: “Doomsday Machine”: Here’s what could happen if the debt ceiling is breached
On Tuesday, the T-bill market was “definitely showing some signs of stress, there’s no doubt about that,” Faranello said over the phone. Meanwhile, the economy “is doing better than the recession narrative” even after the recent regional bank turmoil, and a move towards 4% of the 10-year interest rate “cannot be ruled out”. That could change quickly, however, based on the outcome of the debt ceiling debate.
Getting something on the debt ceiling by June 1 “will be a challenge,” Faranello said. The risk of default “while small is not zero percent,” as is the prospect of chaos if negotiators get too close and trigger a bout of confusion in the Treasury market.
“At the very least, there would be pretty severe economic damage from a default or any confusion,” it “could be messy” and “you would see that impact on risky assets,” he said.
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