The Disappearance Of 'The Hump' Is The Clearest Sign Yet That Markets Aren't Worried About The Debt Ceiling Anymore
One of the clearest signs yet that debt ceiling fears have faded from the market is the recent shift in the yield curve for short-term U.S. Treasury bills.
At this point, it looks like the Republican party has completely backed down from the debt ceiling fight. Today they offered a three-month extension of the ceiling in exchange for a pledge from Senate Democrats to pass a budget – which they haven't done in a while.
The chart below shows two 3-month T-bill curves. The curve plots different maturities on the x-axis against yields on the y-axis. One would expect a typical curve to slope upward – as the future is uncertain, and the probability of default sometime in the distant future is necessarily greater than that in the near term.
However, there has been an unusual development in the T-bill market as of late. A "hump" has emerged at the front of the curve, causing it to slope downward instead of upward. That's the blue line, which shows the shape of the curve on January 15.
Earlier this week, the "hump" at the front of the curve suggested that traders were concerned about the possibility of default on short-term debt, causing the yields on bills maturing around 2/28/13 and 3/7/13 to rise above those maturing 2/21/13.
Today, the hump disappeared, and the curve – shown in red – normalized mostly.
The implication is that traders are no longer expressing elevated concerns of a default around March 1, when the debt ceiling battle was supposed to culminate before the Republican party agreed to the latest deal.
The curve is still slightly inverted at the front today, but that's mostly just noise, a bond trader tells us.
Nonetheless, the normalization to a more upward-sloping curve suggests that things are back to normal, and traders aren't so concerned anymore.