As the government lurches toward the debt ceiling -- and a possible default -- investors are moving out of short-term U.S. Treasuries. The government's short-term cost of borrowing has surged as a result.
Check it out:
As you'll notice, 1-month T-bills currently yield 0.25%. That's three times more than 3- and 6-month T-bills, and even more than the yield on 1-year U.S. Treasuries.
If you buy a 1-month T-bill today, your annualized rate of return would be higher than the annualized returns on any U.S. government debt up to two years in duration. You won't see a chart like this unless there is concern about a government's ability to pay its obligations.
Why the weird curve?
Countless asset managers, banks, pension funds, and other institutional investors who own government debt are worried about liquidity. If the U.S. government goes over the debt limit, and cannot find a way to pay its debt obligations, the owners of 1-month U.S. treasury bills might not be able to turn their Treasuries into cash.
Liquidity is the chief concern for corporate treasury departments and money market account managers around the country. When a bill comes due, companies have to have cash to make payments. This cash is often stored in short-term Treasury bills.
Fidelity is one such asset manager that ran away from U.S. government debt. It sold all of its Treasuries with maturities at or around the October 17th deadline to extend the debt ceiling. JPMorgan Chase's (NYSE: JPM ) asset management arm did the same, parting with debt that matures in October and November. JPMorgan's banking unit hasn't yet commented on whether or not it would sell its short-dated Treasuries.
All that selling pressure is driving up rates on the short-end of the curve. In fact, rates for 3-month T-bills have quadrupled from 0.02% on October 1 to 0.08% on October 11. On October 8, the U.S. government sold $30 billion in 1-month bills at a rate of 0.35%, the highest rate it has paid to raise short-duration funds since 2008.
Not all fund managers are scrambling to sell, however. Some are staying in short-term Treasuries, believing that a default won't happen. Deborah Cunningham, who heads up money market funds at Federated Investors (NYSE: FII ) told Bloomberg that "if we thought there was going to be a default, we'd be working on those contracts right now. And we're not." She's referring to contracts that allow money market funds to borrow against Treasuries for short-term capital. Clearly, Federated Investors thinks Congress will get a deal done.
But long-term confidence hasn't been rattled
It's worth noting that the movements in debt 20-30 years out can still be measured in tiny basis point moves since October 1, reflecting confidence that the government will eventually sort out a partisan battle over the debt ceiling.
But for the time being, until there is any effort to raise the debt ceiling, the market for U.S. Treasuries will continue to favor longer-term issues over short-term T-bills. The U.S. Treasury is the "bank" for companies with billions of dollars they want to keep liquid. Until the debt ceiling is raised, Treasury securities are no longer a good place to store cash balances. And as you can tell from the yield curve, there are clear concerns that the government may allow itself to default.
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