T-Bills Are Getting Whacked Again

The U.S. Treasury bill market is getting thrust back into the spotlight again today as sellers of short-term U.S. government debt obligations send yields higher across the curve, as the chart above illustrates.

Usually, the T-bill market is pretty quiet, as the perceived creditworthiness of the U.S. sovereign typically makes T-bills one of the safest of safe havens. In October, however, institutions moved out of these instruments in size and sent yields surging as Congress wrangled over increasing the nation's debt limit, and the prospect of a technical default on U.S. debt seeped into the marketplace.

Since the temporary resolution of the debt ceiling issue in October, the market has returned to a more normal state of affairs - at least, until today.

Two things are hitting this market all of a sudden:

1. Central banks in emerging markets, which typically invest the U.S. dollar portions of their foreign exchange reserves in T-bills, are redeeming their cash in order to prop up domestic currency markets that are taking a tumble as a broader bout of risk aversion rises across the globe.

"There was some Asian central bank selling overnight, perhaps more around that we didn't come across," says David Ader, head of government bond strategy at CRT Capital.

"We mention this because if it happens further, take it in the context of, we suspect, intervention against weaker EM currencies. That's likely to bring some pressure on the shorter coupons, which is where the paper is owned and something we saw during the summer selloff."

2. There seems to be some concern over the potential for another standoff in Congress over the debt ceiling again.

Patty Murray, the Democratic Senator from Washington who was instrumental in hatching the budget deal that ended the government shutdown in October, says today she is taking a harder line on the debt ceiling.

"We will not negotiate over whether or not the United States of America should pay its bills," she writes in a letter out today. "And once again, before they get any further down this damaging path, we call on our Republican colleagues not to play politics with our economic recovery."

So, the brinksmanship is already beginning.

"Absent a deal on the debt ceiling we expect T-bills maturing in late February and early March to move higher in yield as we approach the ceiling date," says Andrew Hollenhorst, a fixed income strategist at Citigroup Global Markets.

"Repo rates are likely to move significantly higher if we get within a few days of the hard ceiling date and we think February repo futures will begin pricing a concession for these higher rates."