Rally in Treasury Bills as Hopes of Debt Ceiling Agreement Boost Confidence


Treasury bills set to mature soon experienced a rally in trading following the Memorial Day holiday, as hopes of a debt ceiling agreement eased concerns over a potential US default.

Yields on Treasury bills due on June 6, the day after the US may run out of cash, were down 13 basis points in Asia on Tuesday, according to Bloomberg data. Yields on bills due on June 15 were also indicated lower by 26 basis points. The trading volumes for these bills are typically light during the Asia session.

President Joe Biden and House Speaker Kevin McCarthy expressed confidence on Monday that a deal to suspend the debt ceiling and cap discretionary spending would pass Congress in the coming days. The deal has gained early support from influential members of both parties' moderate and pragmatic factions.

Investors had been avoiding at-risk securities, causing yields on some bills to surpass 7% last week, after Treasury Secretary Janet Yellen warned that the government would exhaust its borrowing capacity by June 5.

"Voting on the US debt ceiling is expected to begin from Wednesday and there appears to be sufficient support to clear passage," said Tapas Strickland, head of market economics at National Australia Bank Ltd. "Focus now shifts to the liquidity implications of rebuilding the Treasury General Account via a deluge of bill issuance."

Analysts anticipate that the Treasury will soon replenish its cash balance and may sell over $1 trillion of bills through the end of the third quarter. Currently, the US cash stockpile stands at a six-year low of around $39 billion.

This could potentially limit declines in shorter-dated yields as investors assess what lies ahead.

"Even if a deal is reached, market risks remain," said Scott Solomon, fund manager at T. Rowe Price.

In addition, longer-dated Treasury yields also fell, with the benchmark 10-year yield dropping five basis points to 3.75% and its 30-year equivalent falling six basis points to 3.90%.

According to Hidehiro Joke, senior bond strategist at Mizuho Securities Co. in Tokyo, this rally is likely a relief for market participants who had taken a cautious stance due to the slow progress in debt ceiling negotiations last week, causing some upward pressure on Treasury rates.

Apart from the passage of the debt deal, bond traders are also considering expectations for Federal Reserve interest-rate policy in June and July, with another rate hike already priced in. The upcoming US jobs report on Friday will be closely monitored to gauge the state of the labor market.

This week also brings a rebalancing of the US Treasury bond index, which will incorporate large quarterly new issues of 10- and 30-year debt, potentially driving demand for those segments of the market.

"The PCE data out on Friday shows the Fed is not completely out of the woods and may need to continue hiking," said Prashant Newnaha, senior Asia-Pacific rates strategist at TD Securities in Singapore, referring to a key inflation measure favored by the central bank.

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