Treasury bills maturing in the first half of June rallied as trading resumed following the Memorial Day holiday after a deal to lift the debt ceiling eased concern over the prospect of a calamitous US default.
Yields on securities payable in early June — seen as most at-risk because Treasury Secretary Janet Yellen has said the government will exhaust its cash as soon as June 5 — resumed their drop on Tuesday, and others due in the first half of the month followed suit. Bills due June 6 yielded 5.2%, down from about 7% at one point last week.
US President Joe Biden and House Speaker Kevin McCarthy have expressed confidence that a deal to suspend the debt ceiling while capping discretionary spending will pass Congress in the coming days, and approval gained early support from prominent members of each party’s moderate and pragmatist wings.
“We will be watching the vote counting over the next few days, hoping no insurmountable political obstacles impede its eventual passage,” said John Velis, a strategist at BNY Mellon. “Should it look as if the deal will move toward passage during the upcoming week, we would expect the curve to continue to normalize – just in time for a deluge of US Treasury issuance.”
Yields on some bills topped 7% last week as investors steered clear of at-risk securities. The price on credit default swaps — derivatives that allow investors to insure against non-payment — peaked well above levels seen in the 2011 debt limit episode, before sliding Tuesday.
Analysts expect Treasury will soon replenish its cash balance and may sell more than $1 trillion of bills through the end of the third quarter, according to some estimates. The US cash stockpile currently sits at around $39 billion, the lowest level since 2017.
That could limit declines in shorter-dated yields as investors attempt to gauge what comes next.
Deluge Eyed
“Markets are likely to price out the massive risk premium in T-Bills,” said Mizuho analysts including Evelyne Gomez-Liechti. “However, we expect the pricing-out of default-panic will be partly offset by the issuance that is set to come.”
Elsewhere, longer-dated Treasury yields also fell. The benchmark 10-year yield dropped 9 basis points to 3.71%.
Aside from the passage of the debt deal, bond traders are also mulling expectations for Federal Reserve interest-rate policy in June and July, with about one more hike priced in. Friday’s US jobs report will be closely watched to see if the labor market continues to show signs of cooling.
This week also brings a month-end rebalancing of the US Treasury bond index to incorporate large quarterly new issues of 10- and 30-year debt, which may drive demand for those sectors of the market.
“The PCE data out on Friday shows the Fed is not completely out of the woods and may need to continue hiking,” said Prashant Newnaha, senior Asia-Pacific rates strategist at TD Securities in Singapore, referring to a measure of inflation favored by the central bank. “This should weigh on front-end maturities more than the back end.”
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