Time to read: 2 min
The so-called “extraordinary measures” that are currently being used to fund the US government are projected to run out in early March. With this “drop-dead” date quickly approaching, it appears that the Treasury bill market is already reacting to the potential disruption. Below I answer some frequently asked questions about the debt ceiling, extraordinary measures and the impact on Treasury markets.
When is the government likely to run out of funds?
US Treasury Secretary Steven Mnuchin has stated that the US Treasury has sufficient cash to last through the end of February before it exhausts its extraordinary borrowing measures. (As you’ll recall, the government was forced to rely on these measures to pay its bills when Congress failed to raise the debt ceiling in early December.) This has caused market participants to be cautious about investing in Treasury bills that mature in early March.
What has been the market reaction?
Concern that the drop-dead date may occur in early March is already evident in US Treasury yields. The yield on Treasury bills due March 1, 2018, is higher compared with bills due Feb. 22, 2018, creating a “kink” at the front end of the Treasury yield curve. Investor concerns remained evident at the most recent auction of the 1-month Treasury bill maturing March 8, 2018. The auction resulted in a yield of 1.48%, which is 28 basis points higher versus the Treasury bills maturing on Feb. 22, 2018.1 These elevated yields suggest that market participants are concerned that Treasury bills may be susceptible to a payment delay by the Treasury, and have been managing their exposures accordingly.
Is a new debt ceiling deal likely?
Invesco Fixed Income believes there will likely be a debt ceiling agreement that allows the government to continue to fund itself and honor its obligations. However, we think an agreement is likely to be last minute — with timing potentially in late February. In our view, a debt ceiling deal covering 18 to 24 months would be optimal, as the markets would likely face less volatility in the short term. While we believe investors would prefer a longer-term deal, we think it is unclear whether Congress can deliver, based on its tendency over the past year to complete shorter-term agreements.
After a debt ceiling agreement, where will the Treasury market turn its focus?
Following the completion of a debt ceiling deal (our base case), we believe the market’s focus will likely turn to Treasury bill supply. The Treasury market is already anticipating increased supply based on the Treasury’s most recent refunding package, announced Jan. 31.
What does a refunding package mean for Treasury bill yields?
The Treasury’s refunding package calls for a significant volume of Treasury bills to be issued in a relatively short period of time in order to meet its funding objectives. This increased issuance will aid in replenishing the Treasury’s cash balances that will likely run down ahead of a debt ceiling agreement. We estimate around $350 billion in net new Treasury bill supply will be created in the first half of the year to rebuild these balances.2 This heavy supply calendar could pressure Treasury bill yields higher in the near term, as the Treasury market contends with absorbing this extra supply and also begins to price in Federal Reserve interest rate hikes, which we anticipate in the first two quarters of this year.
1 Source: TreasuryDirect, as of Feb. 6, 2018
2 Estimates based on US Department of the Treasury, Current TBAC Minutes Press Release and Invesco calculations, Jan. 31, 2018.
Blog header image: Felix Lipov/Shutterstock.com
Past performance is not a guarantee of future results.
Treasury securities are backed by the full faith and credit of the US government as to the timely payment of principal and interest.
A basis point is one hundredth of a percentage point.
Justin Mandeville joined the Invesco Global Liquidity team in January 2015 as a Portfolio Manager, and is involved with the management of short-term Treasury, agency and repo securities.
Mr. Mandeville began his career with Vanguard’s client relationship management group before transitioning to Vanguard’s Fixed Income and Money Market team.
Mr. Mandeville earned his BS degree in business administration from Pennsylvania State University, and his MBA, with a concentration in finance, from Drexel University.