The most closely watched market all week has been the Treasury bill market.
Yields on 1-month Treasury bills have been soaring as market participants priced in greater and greater chances of a default on these bills resulting from inability in Congress to agree on raising the debt ceiling, which the Treasury will otherwise hit on October 17.
Today, the stock market is rallying on the prospect that warring parties in Washington will agree on a short-term debt ceiling increase that extends the debate for another six weeks.
As a result, the T-bills that have been getting killed this week — those maturing between October 17 and October 31, the timeframe over which a default scenario would be most likely — are catching a nice bid, and yields are dropping.
However, as the chart above shows, yields on 1-month bills six weeks out — when the proposed extension would end — are actually rising (especially those maturing November 29). Perhaps market participants are already preparing for round two.
Société Générale global strategist Kit Juckes says if politicians do agree to this short-term increase, a fourth-quarter rally in risk assets is out the window.
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