The Treasury market is starting to price in the possibility of a US debt default in July
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Matthew Fox
Apr 20, 2023, 02:50 IST
Chip Somodevilla/ Getty Images
The Treasury market is starting to price in the possibility of a US debt default later this summer.
The difference in yields between US Treasury bills maturing in May and July hit a record 1.49%.
"Investors are likely demanding more to hold those securities at risk of delayed payment," LPL Research said.
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The US Treasury market is starting to price in the possibility of a US debt default amid a showdown in Congress, according to a Wednesday note from LPL Research.
The alarm bells in the Treasury market are being heard in short-term Treasury bills and their current yields, with investors seeking a higher rate of return for the risk they're taking on by buying Treasury securities that are scheduled to mature during the summer months that a debt default could happen.
"Treasury bills that mature in May are yielding about 1.2% less than t-bills that mature one month later (around June) and a record 1.49% less than t-bills that mature in July," LPL's chief fixed income strategist Lawrence Gillum said.
The one-month Treasury bill currently yields about 3.71%, compared to 5.14% for a 3-month Treasury bill.
"Investors have bid up the price of these securities seemingly at the expense of debt that matures around the expected x-date(s)... investors are likely demanding more to hold those securities at risk of delayed payment," Gillum explained.
The difference in yields between T-bills that mature in May and July is at levels that dwarf what was seen during the last serious debt showdown in 2011, when the S&P downgraded the country's debt rating to AA+ from AAA.
A similar scenario could play out this time as Republicans show no signs of working with Democrats to pass a debt limit increase, despite continued remarks from both sides of the aisle that a US debt default "is not an option."
"Another rating agency, Fitch, has threatened to do something similar [to S&P in 2011] if Congress fails to act soon. Another debt downgrade would likely be disruptive to financial markets. While we think Congress wil act in time and get a deal done, these games of political chicken can introduce volatility to markets," Gillum said.
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