Debt Ceiling Impacts Short Term Treasuries
Add “looming debt ceiling” to the list of most frequently heard phrases in 2023. Just as we grew weary of hearing about “transitory inflation” in 2022, we may grow tired of hearing about the debt ceiling in 2023. However, it should not be casually dismissed, for recent actions in the usually calm short-term treasury market are showing worrisome signs. One of these signs showed up in the bond market this week when short term rates moved considerably higher.
The table below shows the yield on U.S. Treasury Bills and Bonds since last Friday. The 2-year, 5-year, and 10-year bonds have all declined in yield while the 3-month bill has stayed steady. In contrast, the one-month bill has moved up materially in yield over the past few days. Treasury bills with the shortest maturities should be one of the safest investments available, but the higher current yields are indicating some stress. Higher yields may at first be welcomed by investors, but they also indicate that there might be some accompanying risk with the higher yields. That risk being the timing around the debt ceiling.
Higher short-term yields may signify that the time frame for finding a resolution to the debt ceiling may be nearer than expected. Initially, economists believed the debt ceiling issues would reach a crescendo in July and August. However, this week the Treasury General Account showed tax collections were much weaker in the past few weeks. Weaker revenue in the form of tax collections means the government could hit the debt ceiling sooner than expected.
All three yields on the shorter end of the treasury yield curve are now much higher than the longer end. The 3-month bill with a yield at 5.16% is 1.26% higher than the 2- year note. This is an inverted yield curve and while not the norm, it is not too surprising given the increase of short-term rates by the Fed and the potential for economic decline. What is surprising is the material moves on the short end and how much higher they are over the 2-year treasury.
There is little coincidence that the higher short-term rates in the 1 – 3-month bills are exactly when things could start to get tenuous with the debt ceiling. John Authers, from Bloomberg commented “The debt ceiling offers a classic example of a ‘black swan’ event—an extreme but very low-probability. Markets have been notoriously bad at pricing them, and for most of this year the attitude seems to have been that it’s not worth the effort of even trying.” We agree with Mr. Authers. Investors should not make drastic changes to their investment portfolios in anticipation of a rare event, but there certainly is an added element of risk heading into the summer months. Our concern is not as much with owning short term t-bills as it would be with owning higher risk assets such as stocks. The “looming debt ceiling” will be just that to the financial markets for the coming months, hanging over the markets until a solution can be found.
Source: Bloomberg, U.S. Dep’t of Treasury
The opinions expressed are those of Harrison Financial Services as of April 27, 2023 and are subject to change. There is no guarantee that any forecasts made will come to pass. This material does not constitute investment advice and is not intended as an endorsement of any specific investment or security. Please remember that all investments carry some level of risk, including the potential loss of principal invested. Returns represent past performance, are not a guarantee of future performance and are not indicative of any specific investment. Diversification and strategic asset allocation do not assure profit or protect against loss.