With the Federal Reserve set to go silent until July 31, bond traders may want to shift their focus to whether Congress and the White House can reach a deal to raise the US debt ceiling before lawmakers head off on summer recess.
The clock is ticking, with the House of Representatives in session until July 26, and the Senate for an additional week. Legislators and President Donald Trump are seeking an accord to lift US borrowing authority and avert a first-ever default on some of the government’s obligations.
Trump on Friday said he thinks the talks are in “good shape,” despite House Speaker Nancy Pelosi rejecting a White House demand for $150bn of spending cuts.
The Treasury bills market is signalling concern, with small pricing dislocations appearing around securities maturing close to potential crunch dates in September and October.
Treasury Secretary Steven Mnuchin has said that under one of the department’s most conservative estimates, there will be a risk of default on payment obligations in early September – before lawmakers are scheduled to return September 9.
“If we go into the congressional recess with no deal, there are areas where Treasury bills will become a little cheaper, early- to mid-September and the beginning of October,” said Gennadiy Goldberg, a senior US rates strategist at TD Securities. “Those are two key zones that investors could avoid.”
Treasuries are coming off a weekly gain, with 10-year yields falling about 7 basis points to 2.05% as traders cemented bets that the Fed will deliver its first rate cut since 2008 at its July 30-31 meeting.
This week, Treasuries may be hostage to swings in risk appetite. Earnings season will kick into high gear, with more than a quarter of S&P 500 companies slated to report. The bond market will also have to absorb a combined $133bn of two-, five- and seven-year Treasury auctions, in addition to bill offerings.
In the bills market, traders are monitoring the back-and-forth in the nation’s capital. An administration official said on Friday morning that the White House remains optimistic about reaching a deal but that the talks will likely continue at the staff level over the weekend and into next week.
TD strategists expect the Treasury to exhaust its borrowing authority in late September or early October. That’s also when the Congressional Budget Office expects the government will run out of cash, according to a February report.
At NatWest, strategist Blake Gwinn expects quarterly corporate tax payments to push the so-called drop-dead date to late October.
Auctions suggest the uncertainty surrounding the debt ceiling is taking a toll. Thursday’s $35bn offering of eight-week bills attracted the weakest demand at that maturity since its introduction in October. An auction of three-month bills at the beginning of the month drew a yield almost 7 basis points higher than the previous week’s sale.
That leaves money-market portfolio managers overseeing $2.4tn of Treasuries-only funds in a quandary as they decide which bill maturities are most vulnerable. “Investors don’t want to avoid four or five auctions, but maybe two or three,” Goldberg said.
What to watch this week: There’s no Fedspeak on the calendar. But Bank of Japan governor Haruhiko Kuroda speaks at the International Monetary Fund in Washington on July 22, and the European Central Bank has a policy decision on July 25, with traders bracing for a dovish statement.
Here’s the economic calendar: July 22: Chicago Fed activity index; July 23: FHFA house price index; Richmond Fed manufacturing; existing home sales.
July 24: MBA mortgage applications; Markit manufacturing and services PMIs; new home sales. July 25: Wholesale inventories; durable goods; retail inventories; jobless claims; Bloomberg consumer comfort; Kansas City Fed manufacturing.
July 22: $36bn of three-month bills; $36bn of six-month bills. July 23: $40bn of two-year notes. July 24: $20bn of two-year floating-rate notes; $41bn five-year notes. July 25: four-, eight-week bills; $32bn seven-year notes-With assistance from Jeremy Herron.
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