One of the clearest signs yet that debt ceiling fears have faded from the market is the recent shift in the yield curve for short-term U.S. Treasury bills.
At this point, it looks like the Republican party has completely backed down from the debt ceiling fight, offering a three-month extension of the ceiling in exchange for a pledge from Senate Democrats to pass a budget.
The chart below shows two 3-month T-bill curves. The blue line was the shape of the curve on January 15. The red line is the shape of the curve today.
Earlier this week, the “hump” at the front of the curve suggested that traders were concerned about the possibility of default on short-term debt, causing the yields on bills maturing around 2/28/13 and 3/7/13 to rise above those maturing 2/21/13.
This is called an inverted curve. One would expect a typical curve to slope upward – as the future is uncertain, and the probability of default sometime in the distant future is necessarily greater than that in the near term.
Photo: Bloomberg, Business Insider
The removal of that hump between Tuesday and today suggests that the curve has mostly normalized, and traders are no longer expressing elevated concerns of a default around March 1, when the debt ceiling battle was supposed to culminate before the Republican party agreed to the latest deal.
The curve is still slightly inverted at the front today, but that’s mostly just noise.
Nonetheless, the normalization to an upward-sloping curve suggests that things are back to normal, and traders aren’t so concerned anymore.