Bond market braces for final debt-ceiling fight

Market angst has percolated for weeks leading up to lawmakers’ return to Washington. Members of US Congress return from summer recess Tuesday with the eyes of bond traders squarely upon them. Among their pressing tasks: increase America’s borrowing authority and prevent an unprecedented default.
Investors have been shunning Treasury bills that come due in early October, just in case there’s no solution by the September 29 deadline that Treasury Secretary Steven Mnuchin has deemed “critical“ for Congress to act. That’s even as he and other members of the Republican leadership have reiterated that they will undoubtedly raise the debt ceiling.

Come Tuesday , the time for talk is over, and the time for action begins.

Political pundits say a viable solution could come from President Donald Trump convincing lawmakers to attach an increase in the debt limit to an emergency aid package for the victims of Hurricane Harvey . That could be a tough sell to some House Republicans, who are likely to vote only for the disaster relief funding. In either case, traders are wary of the political gamesmanship that’s become all too familiar around the debt ceiling.

“The idea that fiscal conservatives in Congress get a bill that includes a debtceiling increase and adds on disaster relief makes it a bitter pill for them to swallow,“ said Blake Gwinn of NatWest Markets in Stamford, Connecticut.

Market angst has percolated for weeks leading up to lawmakers’ return to Washington. It’s poised to get worse as the days remaining to raise the debt ceiling dwindle. The White House is said to want to extend the debt limit to move back the specter of a US default until after Congress can address funding for the full fiscal year and the Trump administration’s tax-overhaul efforts.

Rates on Treasury bills maturing Oct.5, one of the maturities most vulnerable to a failed debt-ceiling increase, rose last week to 1.21 per cent from 1.12 per cent a week earlier. Bills that come due on October 12, which could also be at risk, have a rate of 1.16 per cent.

To put it simply, the October maturities have become “hot potatoes“ in the $1.7 trillion T-bill market, said Mark Cabana, head of US short rates strategy at Bank of America Corp.

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