3 things to know about markets and the debt ceiling fight as Memorial Day weekend approaches

The protracted battle in Congress over the debt ceiling prompted Fitch Ratings to put the U.S.’s Triple-A credit rating on debt issuance at “ratings view negative” late Wednesday, indicating a “deviation” of the debt ceiling.

Concerns over the debt ceiling have been reflected in the price of Treasury bills, particularly those maturing on June 1, or the “X-date,” when Treasury Secretary Janet Yellen originally expected the U.S. would no longer have enough funds to meet its debt obligations. to pay all bills. , without agreement in Washington. Those stocks briefly touched yields north of 7% on Wednesday, or about what higher-quality junk bonds fetch, before Friday’s rally extended.

“What madness,” said Judith Ranieri, senior portfolio manager at the Gabelli US Treasury Money Market Fund. “I’m in the camp that really feels like they’re going to make a decision,” he said of the debt ceiling. “Every party has to give a little bit. Then we can move on.”

But until then, here are three things to know about the markets and the debt ceiling as Memorial Day weekend approaches:

1. Leave the dead date

President Joe Biden’s team and House Speaker Kevin McCarthy’s deputies are close to an agreement to raise the current $31.4 trillion debt limit, but getting a deal through Congress quickly could prove difficult.

Yields on 1-month Treasury bonds

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were lower at 5.54% on Friday, but still down from 0.50% a year ago, according to FactSet.

That compares to the 1-year Treasury yield

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5.24% and the 10-year Treasury yield

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by 3.80%. Typically, bond yields are higher with longer maturities because the expected risks of default may be more difficult in the future.

In 2011, it took two days after Congress struck a debt ceiling deal to pass legislation raising the debt ceiling. Yellen said Friday that Congress must raise or suspend the U.S. debt ceiling by June 5 or risk default, extending the previous deadline by several days.

Those dates are not clearly defined. Economists at Goldman Sachs say the US Treasury will run out of funds by June 9 without a deal on the US debt ceiling, which they see as likely. However, some analysts warned that talks could drag on until the Federal Reserve’s next rate-setting meeting on June 13-14.

While a full-blown default by the US government could cause turmoil in global financial markets, even a brief default could send an already fragile economy into a mild recession.

Read: What happens if the debt ceiling is not raised? “If ever there was a time for a rainy day, this is it.”

2. Lessons from the 1979 payment blip

According to the Wells Fargo Investment Institute, there may be precedent for how the Treasury can handle any missed interest payments on maturing Treasury bills in the event of a technical default.

In 1979, a technical glitch caused a “spill” in payment processing that caused some delays in interest payments on some Treasury bonds. Legal battles and new legislation followed, allowing investors to be made whole for delayed payments in June, the strategist said in a client note on Wednesday.

Gabelli Funds’ Raneri says he limits exposure to Treasury bills with X-date maturities, while favoring auctions of two- and three-month bills. “I think a lot of money market funds are avoiding the short end of the curve because of this concern.”

Read also: How will the Fed respond to a debt ceiling breach? Here are some plays on the board.

3. The US still has low interest rates

The U.S. Treasury reached its current borrowing limit in January and reduced its cash account at the Federal Reserve, with Fitch Ratings putting its balance at about $70 billion as of Wednesday.

While the new debt limit would mean borrowing from the public at much higher interest rates than in the past few years, Oxford Economic pegged federal interest payments as a share of gross domestic product at 1.9% in 2022, down from 3% in the early 1990s. , “although the debt level is significantly high.”

The Treasury is expected to release the issuance of Treasury bills when the borrowing limit deal is reached. Analysts expect interest rates to exceed the roughly 5% rate offered by the Federal Reserve’s popular reverse repo facility to lure funds there into shorter-term Treasury debt overnight.

Read onThe debt ceiling deal will raise new concerns. who will buy the flow of treasury bills?

Ryan Sweet, chief US economist at Oxford Economics, said that “higher interest rates this year will increase interest payments as a share of GDP, but the share will not approach the peak where the government cannot finance its debt and higher interest payments. are no reason not to raise the debt ceiling,” in a client note Wednesday.