T-bills maturing in the early part of June are seen as ‘at risk for a delayed payment,’ says Lawrence Gillum of LPL Financial.

By: Vivien Lou Chen

Continued uncertainty about whether a debt-ceiling resolution can come together fast enough to avoid a government default had yields on Treasury bills maturing in the first eight days of June bursting through 7% on Wednesday.

Volatile trading brought another aggressive round of action in rates, as well as discrepancies in some of the data. According to Tradeweb, yields on T-bills maturing on June 1 and June 8 were still above 7% as of 4 p.m. Eastern time, while the rate on the bill that matures on June 6 was below that level after having briefly surpassed it. However, Bloomberg data showed all three rates below 7% as of late Wednesday.

That basket of rates reflects yields on government obligations maturing within days after the so-called “X-date” of June 1, when Treasury Secretary Janet Yellen said the government might be unable to pay all its bills if no action is taken on the debt ceiling.

The Treasury bill market is where debt-ceiling angst has played out the most and investors are questioning whether the government will be forced to miss payments after June 1. At the moment, the T-bill market is in a state of dislocation, one in which yields ranged from as little as 2.614% on government obligations maturing on May 30 to as high as 6.881% on the bill that matures two days later on June 1, according to Bloomberg’s data.

The higher the yield on a Treasury obligation, the more investors are demanding to be compensated for the risk of holding that bill. Yields also rise when investors are selling securities or staying away from the underlying maturity. Rates started to top 6% on Tuesday, the same day that a government auction of 21-day T-bills produced a 6.2% yield. Wednesday’s latest moves suggest that investors and traders are increasingly factoring in some risk that the government could cross the X-date without a debt-ceiling resolution.

The market regards bills maturing anytime during the early part of June as “at risk for a delayed payment and no one wants to own them,” said Lawrence Gillum, the Charlotte, N.C.-based chief fixed income strategist at LPL Financial. “Ultimately, markets expect something to get done, but money managers who have to own those T-bills are not taking any chances,” he said via phone.

Meanwhile, money market funds appeared to be pouring into the T-bill that matures on May 30, just before the X-date, “out of an abundance of caution,” Gillum said.
For much of Tuesday, the broader financial market appeared to be relatively confident that a debt-ceiling agreement could be reached by June 1, a day after President Joe Biden and House Speaker Kevin McCarthy each described talks as “productive.” Then came word of McCarthy telling House Republicans on Tuesday that negotiators were nowhere near a deal yet, with Bloomberg citing Republican Rep. Ralph Norman and another unidentified person in the room.
While House Republicans are growing skeptical of Yellen’s June 1 debt-ceiling deadline, McCarthy sounded more upbeat on Wednesday, saying debt-ceiling talks are “going a little better.”

All three major U.S. stock indexes DJIA, 0.91% SPX, 1.13% COMP, 1.95% finished lower on Wednesday as debt-ceiling concerns weighed on the market. Meanwhile, one- through 30-year Treasury yields all ended higher as traders focused on the part of the Federal Reserve’s May meeting minutes that indicated policy makers might be prepared to hike rates again.

Gillum and Greg Faranello, Head of U.S. Rates at AmeriVet Securities in New York, said they see a small chance of no debt-ceiling agreement by June 1. Under such a scenario, the Treasury market would fall into “disarray,” with T-bill yields spiking in a manner reminiscent of last year’s crisis of confidence in the U.K. bond market, they said. It would also make it harder for the Fed to hike rates on June 14, and likely lead to a flight-to-quality trade in longer-term Treasurys as equities sell off.

The T-bill market was “definitely showing some signs of stress” on Tuesday and Wednesday, Faranello said via phone. Meanwhile, “the economy is doing better than the narrative of recession,” even after the recent turmoil in regional banks, and a move toward 4% in the 10-year rate this year “can’t be ruled out.” However, that could change quickly based on the outcome of the debt-ceiling debate.

Getting something done on the debt ceiling by June 1 “is going to be a challenge,” Faranello said. The risk of default “is small but not a zero-percent probability,” as is the prospect of chaos if negotiators come too close to the wire and create a period of confusion in the Treasury market.

Already, “confusion is definitely playing out, no question about it,” he said.