Debt cap fears are beginning to be manifested in short term Treasuries. Yesterday the government sold one-month bills at the highest level in many years underscoring just how quickly the debt ceiling landscape has shifted in the wake of Treasury Secretary Yellen’s announcement that the government could run into limitations as soon as early June.
Yesterday the government sold $50 billion of four-week securities at 5.84%, the highest yield since 2000 according to Bloomberg.
Just last week the Treasury sold one-month notes at 3.83%.
The appropriate question to ask is whether the market is now entering the danger zone that the market was looking to avoid…a default or a prioritization of payments focused on the sovereign debt at the expense of all other payments?
The urgency is being heightened by the narrowing of the window to achieve some kind of political fix. According to Bloomberg between now and June, members of the House and Senate are scheduled to be in town at the same time for just seven days.
The Treasury also sold $45 billion of 8-week bills at 5.40%.
The risk that Congress will fail to act drove 3-mos Treasury Bill yields to over 5.25%. At one time yesterday the inversion between the 3-month Treasury Bill and the 10-year Treasury was almost 2 percentage points, the most since 1992 according to Bloomberg. Most will readily acknowledge this gap is the result of fears surrounding an unprecedented default.
Speaking of fears and the direct inverse of Fed policy, the swap market is now pricing a 25% chance of a 25-bps reduction at the next Fed meeting in June and almost 100% chance of one occurring in July.
Market sentiment indicators are exactly that…sentiment indicators that can change radically in moment. The catalysts for today’s view is continued regional banking fears and rancor/default possibility that may be associated with the debt ceiling debate.
There is near unanimity an eleventh-hour compromise will occur but the vitriol and the cost to confidence may be great.
Changing topics, at 8:30 April’s unemployment data is released. Non-farm and private sector payrolls are expected to increase by 180k and 156k, respectively, a 3.6% unemployment rate, a 0.3% increase average hourly earnings, a 34.4-hour work week, and a 62.6% labor participation rate.
Any release the is considerably different than expectations can generate an outsized response.
After the close, AAPL posted results that largely met expectations. Shares are up about 2%.
Last night the foreign markets were up. London was up 0.39%, Paris up 0.38% and Frankfurt up 0.67%. China was down 0.48%, Japan up 0.12% and Hang Seng 0.50%. Futures are up about 0.5% on AAPL earnings, regional banking calm and the belief the Fed may reduce interest rates perhaps as early as July. The 10-year is off 4/32 to yield 3.40%.
