If Congress is unable to produce a budget deal today, the U.S. will hit its October 17 debt ceiling, which is when the Treasury Department will no longer have the authority to borrow money by issuing Treasury securities like T-Bills, T-Notes, and T-Bonds.
The stock market has been pretty sanguine considering the near-term uncertainty. Then again, the stock market is a long-term investment vehicle.
Uncertainty is manifesting in short-term securities, particularly in Treasury bills where yields continue to blow out on fears that the government won’t pay up when these securities mature.
Morgan Stanley’s Hans Redekar included this chart (above) of the T-Bill yield and the 5-year U.S. credit-default swap (CDS) spread, which measures the cost of insuring against a credit event like a default. Yields and spreads are blowing out reflecting investors’ worry about the near-term.
Here’s Morgan Stanley’s Hans Redekar in a note that was published earlier today:
Down to the wire. The US debt ceiling negotiations paused yesterday, suggesting that it is more likely to go right to the October 17 deadline before an agreement is reached. Meanwhile, the pressure is mounting from both the credit agencies and markets. Fitch has placed the US on negative watch as a result of the debt ceiling negotiations while the yields on US bills have spiked higher. The USD performance has been mixed so far, with gains against the low yielders within the G10, but struggling against the traditional high-beta currencies. The heightened uncertainty could see the USD pause even against the low yielders. FX volatility, which has been on a downward trend despite the rise in volatility in other asset market, could also spike.
Leaders will meet again today in their effort to pass a budget deal which is currently being described as “on track” and “very close.”
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