The market is freaking out about the debt ceiling

Investors are starting to brace for yet another debt ceiling debacle.

The evidence of that is found in Treasury bills, an often overlooked but highly sensitive corner of the market that reflects the premium investors want for lending to the US government.

The Treasury Department auctions bills that mature within a year as a way to borrow from the public. Amid concern that the government will run out of funding mid-October, the yield on Treasury bills due that month are spiking.

Yields on bills due October 5 rose Thursday to 1.175%, the highest level since August 10, according to Bloomberg. Bills due the following week jumped to the highest level since they were issued in October 2016.

The chart below shows the yield on the Treasury bill expiring October 12:

Treasury yields

By mid-October, Congress must vote on whether to raise America’s borrowing limit and keep the government funded. Failure to do so would lead to a government shut down. In 2013, the government shut down for 16 days after Congress disagreed on funding for the Affordable Care Act.

The issue this time is funding for the construction of a border wall along the southern US border, and Trump’s public disagreements with key Republican leaders in Congress.

Democrats have rejected Trump’s request for $US1.6 billion to build the wall. At a rally in Phoenix on Tuesday, Trump indicated he was ready to shut down the government in order to fulfil the campaign promise. But the following day, House Speaker Paul Ryan said his colleagues did not think a shutdown was “necessary.”

Trump’s feud with the Senate Majority Leader Mitch McConnell became public earlier this week after the New York Times reported that they hadn’t spoken for weeks. Trump had blamed McConnell for the failure of the healthcare bill, while McConnell said he doubted that Trump could salvage his presidency.

Trump tweeted Thursday that he had asked McConnell and Ryan to tie the debt ceiling legislation with a Department of Veterans Affairs bill the house approved on Tuesday. “They …didn’t do it so now we have a big deal with Dems holding them up (as usual),” he said.

This conflict could stifle efforts to pass other items on the Republican agenda including tax cuts.