Treasuries rise as US hits debt ceiling

US Treasury investors were calm on Monday as the United States hit its debt limit, with prices rising on faith lawmakers will reach a deal to increase the debt ceiling before a default. Declining risk appetite across markets also helped lift bond prices as uncertainty remained over whether Greece will face a debt restructuring and after data showed New York state manufacturing grew at is slowest pace in five years in May.
The US Treasury Department said it can stave off default until early August, in part by tapping federal pension funds, as the nation reached its $14.294 trillion debt limit. See, Bond investors have remained sanguine with yields sitting near five-month lows on the view a default remains very unlikely. "The markets today feel like you're ultimately going to get there," said Rick Rieder, head of fundamental fixed income at BlackRock, where he oversees almost $600 billion in assets.
"To position in front of not getting there at this point in time could be a pretty losing proposition because there are other factors at play that are certainly keeping rates low," he added. Benchmark ten-year notes rose 7/32 in price on Monday, with yields falling to 3.15 percent from 3.17 percent late on Friday. Thirty-year bonds rose 17/32 in price to yield 4.28 percent, down from 4.31 percent. "The bottom line is that threats to default are not credible," said Carl Lantz, interest rate strategist at Credit Suisse.
The longer the debate is drawn out, however, the lower Treasury bill yields will fall as a supply shortage in short-dated debt worsens, he added. Six-month Treasury bills yielded 0.07 percent on Monday, only slightly higher than record low yields of 0.06 percent on May 5. Three-month Treasury bills yielded 0.025 percent, after falling as low as 0.01 percent on May 9.
Supply of outstanding Treasury bills, already at its lowest levels since the 1960s relative to demand, is likely to fall by around $15 billion per week through the end of June. Breakevens on Treasury Inflation-Protected Securities (TIPS) also declined on Monday as oil prices fell, and any further risk reduction in commodities may send yields still lower. Breakevens of five-year TIPS fell to 215 basis points from 219 basis points on Friday and are down from a recent high of around 249 basis points in late April.