The on-again-off-again economic recovery is having a tough time convincing the crowd to price in higher US Treasury yields, but maybe political gridlock in Washington can push rates higher. In fact, some of the short maturity Treasuries that are thought to be at risk of not being repaid because of debt-ceiling uncertainty have endured selling to the point that their yields have shot up to two-year highs, according to The Wall Street Journal. Dysfunctional politics in Washington is old news, but perhaps there’s a new if not-entirely intentional byproduct: higher rates.
The crucial factor, of course, is the approaching Nov. 3 deadline for raising the debt ceiling. Treasury Secretary Lew yesterday expressed concern that the clock was ticking and the possibility of a last-minute solution could raise the risk of a fiscal accident “that would be terrible.” Speaking on CNBC, he said that “our best estimate is November 3rd is when we’ll exhaust what we call extraordinary measures; those are things we can do to manage things. I will run out of things that I can manage on November 3rd.”
Meanwhile, the Journal reported late yesterday afternoon:
The yield on the bill maturing on Nov. 12 jumped to as high as 0.178% on Monday, according to Tradeweb. It marks the highest intraday level since October 2013 when the bills market was hit by fear of a debt-ceiling standoff.
In late-afternoon trading, the selling pressure eased and the yield settled at 0.601%. That still represents the highest closing level since February 2014 and climbed from 0.036% on Friday and around zero on Thursday. Bond yields rise as their prices fall.
“The distortion in bills will continue to widen over the next few weeks, unless we get some positive news on the debt ceiling,” said Thomas Simons, vice president and money-market economist in the fixed-income group at Jefferies LLC.
For the moment, there’s no obvious effect on longer maturities, although a strange calm has settled over the 2-year and 10-year yields in recent days, based on daily data from Treasury.gov. In both cases, yields have been unchanged for three straight days through yesterday (Oct. 20).
Meantime, the Treasury yield curve hasn’t changed much lately. As of yesterday, most maturities are slightly below their equivalents from 30 trading days earlier, but the difference doesn’t look abnormal relative to recent history.
Until resolution arrives in the debt-ceiling debate, yields may be subject to strange and unusual behavior in the days ahead. The combination of an uncertain macro environment and tangled politics in Congress runs the risk of dispensing a Halloween fright as the countdown to the Nov. 3 deadline approaches.
What are the odds of a compromise that avoids a fiscal train wreck? At the moment, the outlook doesn’t look encouraging, or so The Hill advised late yesterday:
Conservative leaders in the Senate and House on Monday said they would not support raising the nation’s debt limit without significant spending reforms, increasing pressure on GOP leaders ahead of a Nov. 3 deadline.
Substantive talks between President Obama and Republican leaders have yet to get off the ground because of uncertainty over who will succeed Speaker John Boehner (R-Ohio) and what can pass the lower chamber.
It became more clear Monday, however, that any proposal to raise the debt ceiling without major fiscal reforms will not pass the House without Democratic votes.
That means Boehner or his successor will either have to give in to Democratic demands for a clean debt-limit increase or face the wrath of conservatives who have roiled leadership races in the House.
Pricing Treasuries was already tough at a time of rising worries about US economic growth and confusion about how or if the Fed might respond via monetary policy. But now there’s a third factor to consider and it’s safe to say that more isn’t better on this front.
“Just think about it, we have a government of the United States, a $4-trillion-a-year enterprise, where swings of a few billion dollars can determine whether or not you have enough cash to pay your bills,” Lew said yesterday. “It’s ridiculous. The debt limit needs to be raised.”
Fiscal sanity, alas, is in short supply within the Beltway… again, which implies that Congress is inclined to hand out tricks rather than treats, short of an attitude transplant under a certain white-domed building just east of the Potomac.
Lest you think all of this is forced upon Congress to reign in a runaway deficit, think again. The federal budget deficit as a percentage of the economy has fallen to the lowest level since 2007.
In short, a shocking disclosure: it’s all about politics.
James Picerno is the editor of CapitalSpectator.com – read more