Bond traders braced as US debt ceiling talks come to a head

Treasury Secretary Steven Mnuchin says "critical" that action is taken by September 29

Members of the US Congress return from summer recess Tuesday with the eyes of bond traders squarely upon them. Among their pressing tasks: increase America’s borrowing authority and prevent an unprecedented default.

Investors have already been shunning Treasury bills that come due in early October, just in case there’s no solution by the September 29 deadline that Treasury Secretary Steven Mnuchin has deemed “critical” for Congress to act. That’s even as he and other members of the Republican leadership have reiterated that they will undoubtedly raise the debt ceiling.

Come Tuesday, the time for talk is over, and the time for action begins.

Political pundits say a viable solution could come from President Donald Trump convincing lawmakers to attach an increase in the debt limit to an emergency aid package for the victims of Hurricane Harvey. That could be a tough sell to some House Republicans, who are likely to vote only for the disaster relief funding. In either case, traders are wary of the political gamesmanship that’s become all too familiar around the debt ceiling.

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“The idea that fiscal conservatives in Congress get a bill that includes a debt-ceiling increase and adds on disaster relief makes it a bitter pill for them to swallow,” said Blake Gwinn, strategist at NatWest Markets in Stamford, Connecticut. “Politicians aren’t going to like feeling pressured to vote ‘yes’ on disaster relief when it’s shoved down their throats.”

Market angst has percolated for weeks leading up to lawmakers’ return to Washington. It’s poised to get worse as the days remaining to raise the debt ceiling dwindle. The White House is said to want to extend the debt limit long enough to move back the specter of a US default until after Congress can address funding for the full federal fiscal year and the Trump administration’s tax-overhaul efforts.

Rates on Treasury bills maturing October 5, one of the maturities most vulnerable to a failed debt-ceiling increase, rose last week to 1.21 per cent from 1.12 per cent a week earlier. Bills that come due on October 12, which could also be at risk, have a rate of 1.16 per cent.

To put it simply, the October maturities have become “hot potatoes” in the US$1.7 trillion T-bill market, said Mark Cabana, head of US short rates strategy at Bank of America.

“I don’t know how willing the Republican majority will be to add the debt limit to a Harvey relief bill,” Cabana said in a telephone interview. At the same time, “not coupling the two would just further complicate the situation and just provide another thing that needs to be dealt with in an already packed legislative schedule.”