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MACRO VIEW COLUMNS: CORRECT: T-Bill Flags Severity of Trump’s Challenge

(Bloomberg) — (Corrects spelling of ex-president’s name in second bullet point) The latest four-week bill auction was arguably the scariest since the lead-up to the 2008 crisis, underscoring just how concerned investors are that President Donald Trump and Congress will fail to resolve cleanly the regular debt-ceiling jeopardy that the U.S. seems locked into.

  • The $20 billion of debt was sold at 1.30%, 1 bp above the 2-yr Treasury yield (see chart); the last auction when bills yielded more than 2-yrs was in March 2008, when expectations for massive Fed rate cuts were pulling down note yields
  • Even in 2013, when the battle between President Barack Obama and Republican lawmakers led to a partial government shutdown, 4-week bill rates at auction only got as close as 3 bps below 2-yr yields
  • Spiking bill rates don’t signal investors are seriously worried about not getting repaid — if you want to see what that sort of risk looks like, recall that Russia’s bills topped 80% in the month before its 1998 default
  • What it does say is the paper sold Tuesday is relatively less attractive than it has been for a long time — arguably because of the likelihood of a period of much greater price volatility — which is something many bill investors are looking to avoid.
  • Unlike true cash, T- bills can swing around based on a presidential tweet or an angry Congress member’s press conference as politicians wrangle over the debt ceiling
  • The other dynamic here is a massive rally in longer-dated debt sending 10-year yields crashing toward 2% — propelled by North Korea tensions, political infighting hampering U.S. reflation legislation and concerns over economic damage from monster hurricanes
  • While the worst of times can bring out the best in politicians of all stripes, Trump has a lot on his plate besides the debt ceiling and his track record so far lacks any major legislative accomplishments
  • Until another muddle-through on the debt ceiling is realized, the pressure at the very short end for a flatter Treasuries curve is here to stay.

NOTE: Garfield Reynolds has covered FX, bonds and commodities over two decades, from Russia to Australia. The observations he makes are his own and are not intended as investment advice. To contact the reporter on this story: Garfield Reynolds in Sydney at greynolds1@bloomberg.net To contact the editors responsible for this story: Mark Cudmore at mcudmore8@bloomberg.net Christopher Anstey

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