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Why Yesterday’s T-Bill Turmoil Is More Bad News For Trump

Courtesy of ZeroHedge. View original post here.

Yesterday we highlighted the turmoil in the T-Bill market, when the sale of $20 billion in 4 week paper priced at a high yield of 1.30%, a whopping 7bps tail, and the highest yield since September 2008.

This was notable as it indicated just how nervous short-term Treasury investors had gotten with the debt ceiling negotiation  just around the corner – now reportedly resolved if only for the time being with the Senate ready to attack a debt ceiling extension to a Harvey aid bill. However, there were other, more pressing concerns. Below is the the latest Macro View from Bloomberg macro commentator Garfield Reynolds, who explains just what the implications of the turmoiling auction were.

 T-Bill Sale Flags Severity of Trump’s Challenges

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 Barrack 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.


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