(Bloomberg) -- Tuesday's four-week Treasury bill auction may prove to be the final moment of tranquility for short-end traders before lawmakers return to work Sept. 5 to tackle the dual threats of a U.S. government shutdown and default.
The $25 billion of debt matures Sept. 28, the day before the deadline that Treasury Secretary Steven Mnuchin has laid out for Congress to raise the debt limit. That breathing room resulted in a mostly uneventful sale. Next week's offering of the maturity may be different. That security will come due within Wall Street's projected early- to mid-October window for when Treasury will exhaust the measures it's been using to stay under the debt ceiling.
Investor angst is growing as Congress has only a limited number of working days to both raise the debt ceiling and hammer out a spending bill for next fiscal year. The prospect of getting both done grew more complicated last week after President Trump threatened a government shutdown and blasted Republican leaders for ignoring his advice on raising the debt ceiling. As a result, traders expect bill rates to climb, even as Treasury shrinks auction sizes to stay under the debt ceiling. This week's offering was $5 billion smaller than last week's.
“We may get a backup before we hit a cataclysmic event where the U.S. defaults on its debt,” said Larry Milstein, managing director of government-debt trading at R.W. Pressprich & Co. in New York. “It drives more uncertainty and investors need to be paid accordingly.”
The market for four-week bills is finally going get a taste of the anxiety that's been roiling older maturities. Since last month, bills maturing Oct. 5 and Oct. 12 have underperformed since they'll mature around the time when the market expects the government won't be able to pay its debt.
Buffer Building
Tuesday's sale drew a rate of 0.96 percent, rising from the 0.94 percent rate the previous two weeks. The bid-to-cover ratio was the highest since the March 7 auction, which came as Treasury was reducing bill offering sizes eight days before the reinstatement of the debt limit.
To some degree, the smaller auction sizes mitigate the risk, according to Milstein. The Aug. 8 offering was $20 billion larger than Tuesday's.
“There's less to digest, even if regular buyers pull back,” Milstein said.
A crucial segment of regular buyers -- money funds -- have already given up and it's seen as a given that they'll continue to shun October maturities. That was evident in the July 24 three-month auction, which drew the highest rate since 2008.
The next threat is that as the debt ceiling's “x-date” approaches, the remaining holders of October maturities -- such as local governments or corporate treasurers -- also head for the hills, causing the kink in the bills curve to become even more pronounced.
To contact the reporter on this story: Alexandra Harris in New York at aharris48@bloomberg.net.
To contact the editors responsible for this story: Boris Korby at bkorby1@bloomberg.net, Mark Tannenbaum, Brian Chappatta
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