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US Investors Nervous About Looming Debt Ceiling Deadline

Traders are asking for higher yields to own previously issued bills maturing March 8 as an auction last week of bills due March 1 drew the weakest demand since May
Finally there’s some inflation in the US economy, and the S&P 500  had its worst week in two years, down 3.9%.Finally there’s some inflation in the US economy, and the S&P 500  had its worst week in two years, down 3.9%.

In the $2 trillion treasury-bill market, where the US government turns for short-term funding, investors are showing they’re pretty nervous about the approaching deadline to raise the nation’s debt ceiling.

With treasury expected to exhaust its borrowing authority as early as the first half of March, a four-week bill sale on Tuesday will serve as the latest gauge of investor anxiety. There’s growing concern that the impasse over the debt limit will become entangled with efforts to keep the government open. Current federal funding expires Feb. 8, and the Republican-led Congress has been working on a stopgap measure to extend that into late March, Bloomberg reported.

Treasury has deployed extraordinary measures to stay under the debt cap since it was reinstated in early December, but investors are wary. The new securities mature March 8, around when the Congressional Budget Office expects treasury to run out of room. Traders are asking for higher yields to own previously issued bills maturing March 8. What’s more, an auction last week of bills due March 1 drew the weakest demand since May.

“People are kind of getting skeptical of March 8 bills,” said Joseph Abate, a strategist at Barclays Capital in New York. “You might argue that the March 1 bill isn’t necessarily vulnerable to payment delay because the treasury probably has sufficient resources to meet outflows and thus might be able to last until” March 5.

Risk of Default 

Treasury has placed the drop-dead date around the end of February. But investors are leaning toward the projection from the nonpartisan CBO, which said last week that the US may run the risk of default without a debt-ceiling increase in the first half of March.

After the Jan. 30 auction of bills maturing March 1, the rate on those securities was higher than debt due a week later. Since then, the rate on debt expiring March 8 has climbed to 1.40%, exceeding that on bills due a week later.

The debt-ceiling showdown is roiling the bills market in another way: Treasury has been shrinking bill auctions. This week’s four-week sale, the size of which will be announced Monday, could be at least $10 billion smaller than last week’s, according to Abate.

That’s because treasury needs to make room for the $30 billion 70-day cash-management bill it plans to sell in conjunction with the four-week obligation. The additional borrowing gives treasury cash on hand and allows it to issue less debt that matures around the potential debt-cap deadline.

So far, Republican leaders’ plan for keeping the government open doesn’t include a move to lift the cap. As long as that’s the case, dislocations in the bills market may persist.

“They reset the clock on extraordinary measures, but congress hasn’t moved on the debt ceiling since Dec. 8,” Abate said. “They’re running out of maneuvering room.”

Confronting Inflation 

For almost a decade, investors have waited patiently for any hint of inflation in the US economy, a sign the recovery can sustain itself without emergency stimulus from the Federal Reserve. Now they’re getting it, and many are shocked at the reaction.

It landed last week with the worst stock market plunge since January 2016. A stronger-than-expected employment report with signs of strengthening wage growth sent the Dow Jones Industrial Average down 666 points on Friday, or 3.9%, bringing its five-day loss to almost 1,100 points. Share volatility surged.

Accounts of how concerned investors should be ran the gamut, from confidence traders will rush in and buy the dip, to warnings this time is different—that selloffs that begin in the bond market have a habit of snowballing.

“It is now signaling, potentially, the end of this eight-year bull rally,” said Rich Weiss, chief investment officer and senior portfolio manager of multi-asset strategies at American Century Investments. The firm manages $179 billion. “The Fed is going to have to move the interest rates, the bond market is recognizing that this incremental economic growth will spur on inflation from various sources.”

Little escaped the selloff. All 11 industries in the S&P 500 tumbled, a coordinated plunge that hadn’t happened since the run-up to Donald Trump’s election. Yields on 10-year treasuries surged as much as 6 basis points Friday to 2.85%, the highest in four years. Oil dropped and the Bloomberg Commodity Index capped its biggest weekly slide in two months.

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