Treasury bills squeezed as debt ceiling deadline looms

SINGAPORE: Short-dated Treasury bills were under pressure on Tuesday and the cost of insuring against a US default hit fresh highs after the Treasury Secretary said the government could run out of money within a month.

Janet Yellen said in a letter to Congress that the agency will be unlikely to meet all US government payment obligations “potentially as early as June 1,” unless Congress acts. Credit default swaps are notoriously illiquid, but spreads have been widening at an alarming rate. Refinitiv-calculated data showed one-year US credit default swap spreads hit 165.81 basis points early on Tuesday.

“There is very little time on the legislative calendar to reach a deal,” said Goldman Sachs analysts in a note. “The next few weeks are going to be unpredictable.” Five-year spreads hit a record on Friday. Tradeweb data also showed pressure on one-month cash Treasuries, with bid-offer spreads wide and yields jumping nearly 18 basis points to one-month highs of 4.616%.

Dealers said markets had also been focused on this week’s Federal Reserve meeting and the US banking turmoil.

Two-year yields rose overnight and were steady at 4.1386% in Asia.

Benchmark 10-year yields climbed a dozen basis points overnight and held at 3.5547% on Tuesday. Bond yields rise when prices fall.

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Regulators seized and sold First Republic Bank to JPMorgan for $10.6 billion, which markets viewed as reducing the latest stress on the US banking system and increasing the likelihood the Fed delivers one more rate hike on Wednesday.

Fed funds futures imply a 95% chance of a 25 bp hike, but also price in rate cuts by the end of the year and traders are waiting to see whether and how much Fed Chair Jerome Powell pushes back on these expectations this week.

A glut of blue-chip corporate bond sales - led by Facebook parent Meta Platforms seeking to raise $8.5 billion - also weighed on Treasuries demand overnight, analysts said.

“That actually pushed up the back end of the curve, particularly the 10-year (yield),” said Alvin Tan, head of Asia FX strategy at RBC Capital Markets.

“In general, risk sentiment has continued to normalise from the March turbulence, and that’s also adding a fundamental support to the higher interest rates in the US”