The debt ceiling: wanting to believe
Even if politicians have so far been unable to come to an agreement that will allow the U.S. debt ceiling to be raised by Aug. 2, the popularity of U.S. Treasury auctions this week indicates investors are still keeping the faith. Still, some are starting to get pickier about which Treasuries they would like to hold.
All three government bond auctions this week enjoyed a strong reception. Yet buyers of the 30-year bonds sold on Thursday, for example, might have felt particularly sanguine about the August debt ceiling date because the first coupon payment on those bonds is not due until Nov. 15.
That contrasts with some older Treasury securities that have payments due Aug. 15 or Aug. 31 which have not traded due to “concern that the coupon payment could be missed,” said Justin Lederer, interest-rate strategist at Cantor Fitzgerald.
A preference for bonds with coupons due after August seems “very valid,” said government bond strategist Ian Lyngen at CRT Capital Group, but the overall performance of the U.S. Treasury market, including Friday’s advance, suggests that “broad, bullish pressures are pushing yields lower.”
Those factors include a desire for a safe investments and the expectation that interest rates would stay low given weakening economic data, said Cantor’s Lederer.
Meanwhile, it’s not clear which, if any, coupon payments on U.S. government securities might be at risk, Lyngen said.
Bills will get rolled over and re-auctioned. If there is a missed interest payment, it might be on a longer-term security where a missed payment would not be as disruptive to the broader market The principle due for bills could involve big amounts and have broader ramifications for the money markets; foregoing a payment in the 10- or 30-year sector might be less of a shock.
Jefferies & Co. money market economist Thomas Simons said buyers bought Treasuries this week as if the chance of default were zero percent. A “huge, aggressive” bid by buyers like insurance firms and foreign central banks emerged for 30-year bonds, he noted.
Some investors simply need long-term assets, like 30-year bonds, to match long-term liabilities, Lederer noted. But underlying the demand is the issue of tributaries of cash that must empty into a river. And in global finance, no river is wider – or more liquid – than the U.S. Treasury debt market. Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ in New York, says a lack of suitable options may be the market’s saving grace.
Where could $9 trillion in marketable U.S. government debt go? Where could these investors go to put that amount of cash to work? Answer: Nowhere.