"Floating" Up To The Ceiling

How concerned should investors be about the pending debt ceiling debate? History has shown us that a resolution always seems to be found, but the recent incidents covered in my last post, “U.S. Treasuries: Caution, Low Ceilings,” underscore the point that this has become a very politically charged, contentious issue. Based on what happened in 2011 and 2013, one would be forgiven for concluding that the 2017 experience will be messy as well.

What Should Investors Focus On?

What exactly do I mean by “messy”? The answer is essentially twofold. Obviously, the political process comes to mind, but for this post, I am going to look at the ramifications for the U.S. Treasury (UST) market—specifically, Treasury Bills. T-bills are the focus because these are the instruments that market participants believe have the greater possibility of being negatively affected if the debt limit is not raised on a timely basis because of the weekly maturity feature of these securities. In other words, the t-bill maturity dates potentially would be occurring right around or right after the debt ceiling needed to be raised, and the concern is that failure to raise the debt ceiling on a timely basis could lead to a delayed payment, though the consensus is that t-bill holders would eventually get paid.

That Was Then

The debt ceiling experience of 2011 and 2013 provides a good snapshot of what investors could expect to see if there is no agreement as the deadline date looms. Obviously, past experiences don’t necessarily mean a similar result for present occurrences, but they offer some useful insights nonetheless. The Federal Reserve (Fed) Board published a study earlier this year showing how t-bill yields performed during the 2011 and 2013 episodes. Board members noted that in each instance, t-bills maturing around the projected deadline date experienced an uptick in yield, with the bills that were slated to be the second to come due after the deadline experiencing the largest gains. In 2011, the peak increase was 19 basis points (bps), while in 2013, the increase was more than twice as big, at 46 bps.

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