What the Markets Are Telling Us About the Debt Ceiling
What Treasury Prices Tell Us
The pricing of short-term Treasury securities reveals that traders believe there is a reasonable possibility that the United States Treasury will miss a payment of interest or principal on securities that come due in early June. That’s when Treasury Secretary Janet L. Yellen says the United States is likely to exhaust all “extraordinary measures” that have kept government borrowing under the debt ceiling.
Concern about what might happen in the early days of June is the main reason for an anomaly in the yields of Treasury bills. Money market fund managers nervous about a possible default have been avoiding Treasury bills that come due then, lowering prices and pushing up yields to a level 0.6 percentage points higher than Treasury bills that mature in July. By August and September, the assumption is that some degree of normality will have returned, and factors like inflation and the Fed interest rate policy reclaim their customary dominance. Yields for bills that mature later in the summer and in early fall are higher than those in July. This barbell pattern is unusual.
It implies two things. First, the markets believe there is a real risk of a default in early June. Second, the possibility of a protracted failure of the United States to pay its bills is seen as extremely low.
That’s because the problem is fundamentally political, not financial.
The markets will supply the United States government with all the money it needs, if only Congress grants the authorization to borrow it. The Treasury market is the deepest and most liquid in the world. Demand for Treasuries is robust and is likely to remain so, as long as the credit of the United States is unimpaired.
But a U.S. debt default could change all of that, and another downgrading of U.S. debt, as was the case in 2011 when the United States came close to default, could increase U.S. borrowing costs.
Source: The New York Times
