Traders are increasingly worried that the US government may soon run out of ways to pay its bills
A $20 billion auction Tuesday for Treasury bills that expire in four weeks - or just after a bill to fund the government must be passed - drew the highest yield since the 2008 financial crisis. For some perspective, the high yield - at 1.30% - was higher than when the government actually shut down in 2013.
This indicates that bond traders want a premium in return for expecting the government to repay them just as it may be running out of funding.
The auction results were "ghastly," according to Ward McCarthy, the chief financial economist at Jefferies.
"The October 5th maturity date for this auction turned off a lot of investors due to debt ceiling concerns," he said in a note.
Yields on existing bills that expire in October jumped by more than four basis points after the auction, according to Bloomberg.
By the end of September, Congress must pass a bill to keep the government funded, or risk a shutdown of non-essential functions. Additionally, Congress must raise the debt ceiling by early October to prevent breaching it and to avoid a default.
The auction came on a very strong day for Treasurys and other safe-haven assets following North Korea's nuclear threats during the Labor Day weekend. The yield on the benchmark 10-year note fell eight basis points to 2.07%, the lowest since the day after last year's election.
As the chart below from Deutsche Bank shows, the yield on bills expiring during the likely period of the debt ceiling showdown are higher than comparable bills during previous episodes.
