BILS - Treasury yield curve short ends continues split as traders game debt ceiling fight

2023-04-24 03:54:07 ET

And unprecedented dislocation between short Treasury maturities continued Monday as traders moved cash away from the 3-month bill likely to be most impacted by a debt ceiling fight in Washington.

The spread between the 3-month Treasury yield and the 1-month yield was already the highest it's ever been and continued that trend Monday morning.

The 3-month yield ( US3M ) jumped 12 basis points to 5.23% and the 1-month yield ( US1M ) rose 2 basis points to 3.36%. That brings the spread to 187 bps.

Money is moving into the 1-month bill and quickly out of the 3-month, which many consider the maturity mostly like to face the eye of the debt ceiling storm. Lower-than-expected tax revenue collections have brought forward expectations of when the U.S. could face a default question.

"US debt ceiling volatility (is) likely to pick up before Memorial Day," BofA strategist Michael Hartnett wrote.

Credit default swaps on the U.S. are the most expensive they've been, with the 5-year CDS at 50 bps, up for 15 bps a year ago.

Still, "despite growing fearmongering," that only implies a 2% chance that the U.S. defaults on its debt, according to Mike Shedlock, who writes the Mish Talk global economics blog.

"Due to grace periods, the likelihood of a payout on a default are much lower still," Shedlock said, but he acknowledged that default would indeed result in "chaos."

Looking to the longer end of the curve, "secular inflation" is the core reason US 10-year Treasury ( US10Y ) is struggling to break below the 3.5% 200-day MA "despite 'peak CPI, peak Fed, impending recession' narrative," Hartnett said.

ETFs: ( SGOV ), ( OPER ), ( USTB ), ( BILS )

More on the debt ceiling

• Speaker Kevin McCarthy seeks $1.5T debt limit boost
• Yield Curves And Debt Ceilings: Investing Beyond The Headlines
• Debt Ceiling: What Investors Need To Know
• An Investor Roadmap For 2023 U.S. Debt Ceiling Crisis

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