Money markets are showing early signs of stress as the deadline for the United States to avoid a debt default looms although fallout is likely to be limited by the dollar's position as the global reserve currency. T-bill yields pushed higher, along with general collateral repo rates as US politicians were yet to find a compromise on a deal to lift the country's borrowing limit before an August 2 deadline to avoid default.
But even if a deal is reached, a budget plan that does not include hefty deficit cuts may result in a downgrade of the United States's AAA credit rating. "A little bit of that has washed through into (unsecured lending)," said one money market trader in Europe.
US three-month T-bill yields have risen seven-fold since mid-July although that only takes them to 0.07 percent with a notable push higher this week. Yields on US T bills maturing on August 4. have also risen, doubling to 12 basis points on Wednesday, much higher than paper maturing on August 2. US money market funds have been seeing redemptions in recent days from both prime, and Treasury-only investing funds, with investors seeking refuge in bank deposits insured by the Federal Deposit Insurance Corporation (FDIC), even if they pay no interest.
That has pushed up borrowing rates with average weighted overnight general collateral (GC) rates in the repo market almost doubling to 9 basis points on Wednesday, according to US clearing house The Depository Trust and Clearing Corporation. The GC rate opened at 0.14 percent on Thursday, rising to 0.18 percent, compared with 0.16 percent at Wednesday's open. Benchmark three-month dollar Libor rates were little changed at 0.25395 percent.
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