What to watch for market stress as the U.S. debt ceiling deadline nears

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NEW YORK, Oct 5 (Businesshala) – Concerns about debt limits nearing the deadline for Congress to raise the US borrowing limit to avoid historic defaults on US debt have begun to haunt investors.

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18 deadline, President Joe Biden said on Monday that he cannot guarantee the government will not breach its $28.4 trillion debt limit unless Republicans join Democrats in voting to increase it. Go.

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There are growing concerns in the market for short-term bills, credit default spreads on US debt and general market sentiment. US Treasury Secretary Janet Yellen has said the government will run out of cash around that date unless Congress raises the limit on federal debt.

Arthur Hogan, chief Arthur Hogan, said: “Debt limit and infrastructure talks with (Washington), DC will continue to be front and center this week, amid signs that rating agencies may be taking the US credit rating down a notch. can take.” Market Strategist at National Securities Corp.

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Short Term Treasury Spread

Treasury bills are a sign of stress in the market, with 1-month bills that will be hit by a potential default that will bill over 3 months.

Compared to 0.038% in three-month bills, one-month bills currently gain 0.1%, close to their highest level since March on an intraday basis. The difference between one month and three month bills is the highest since March 2020.

Portfolio managers typically avoid the risk of default to avoid bill issues, even though the chances of a failed payment are very small. This can send yields higher than long-term debt on some issues, an unusual phenomenon in the yield curve, which is usually sloping upward.

Businesshala Graphics

US repo market

Barring a few minor ups and downs, the US overnight repurchase agreement (repo) market has shown little sign of tension.

The overnight repo rate closed at 0.05% on Monday. Traders said, there were some volatility in the last few days. Last week, the overnight repo rate was trading as high as 0.07% but fell as low as -0.10%.

As the loan limit expires, repo rates have become volatile as excess money flows into the banking system as reserves, with the US Treasury expected to reduce its cash balances. Banks can choose to either invest in the repo market, which lowers rates, or lend to the Federal Reserve through its reverse repo facility. This repo takes money from the market and pushes the rates slightly higher overnight.

Dan Belton, fixed-income strategist at BMO Capital in Chicago, said, “I don’t see anything major at this point, except maybe a few high volatility, which makes me think it’s going to increase the debt cap on the upside.” Anger is the result.”

Rates in the repo market are also affected by inflows from state-owned state enterprises such as Fannie Mae and Freddie Mac on certain dates of the month.

Last Thursday, volumes soared to a record $1.604 trillion in the Fed’s reverse repo window, as investors flocked to a US central bank facility where they are paid 5 basis points guaranteed for overnight cash without counterparty risk.

fixed repo market

options market

When investors are concerned about an upcoming event, they typically load up on options hedges, which increases the volatility of those options.

Options on the S&P 500 (.SPX) and its Tracking ETF (SPY.P), which expire on October 15, just before the debt limit deadline, exhibit a slight additional volatility in their value, when the first and Compare with contracts that expire later. .

A further increase in volatility in the coming days and for expiry around the October 18 deadline would suggest that debt limit performance is attracting more investor attention.

Businesshala Graphics

credit default swaps

Credit default swaps that pay off in the case of US government defaults have risen in recent times, although they occurred during the summer of 2011 where prolonged debt limit negotiations prompted rating agencies to downgrade US debt. Had traded for, live far below that. for Moody’s Analytics.

According to Refinitiv data, one-year credit-default swaps are now trading at levels seen in December 2020, nearly 40% lower than in March 2020, when much of the US economy closed during the early stages of the coronavirus pandemic. happened. .

CDS

money market flow

In a sign of growing panic, investors sent nearly $33 billion to money-market funds in the week ended September 29. According to the data, the move to cash pushed the net worth of the $3.9 trillion money market industry to its highest level since June. From the Investment Company Institute.

Businesshala Graphics
Reporting by David Randall, Saqib Iqbal Ahmed and Gertrude Chavez-Dreyfus; Additional reporting by Stephen Culp; Editing by Megan Davis and Lisa Shumaker

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