US T-Bill Yields Surge As Debt-Ceiling Concerns Fuel Investor Anxiety, Default Insurance Costs Reach 2009 Highs

U.S. Treasury bills, also considered the world's safest asset, are having a deeply negative trading session on Tuesday, May 2, as the yield on the three-month T-Bill skyrocketed 18 basis points to 5.23% amid growing concerns that the U.S. government will run out of cash by June. 

At the same time, the cost of insuring against a U.S. debt default, as measured by the 5-year credit-default swap, rose to over 60 basis points, the highest level since March 2009. 

Treasury Secretary Janet Yellen expressed concern that the government may run out of money before the beginning of June, and President Joe Biden called a meeting of lawmakers on May 9 to discuss increasing the debt ceiling.

The White House has stated that it will not negotiate with Republicans over the extension of the debt ceiling, while House Speaker Kevin McCarthy has pledged not to raise the ceiling without consistent budget cuts. McCarthy agreed to attend the May 9 meeting after speaking with Biden, a GOP aide said Tuesday.

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Jan Hatzius, an economist at Goldman Sachs, previously believed that the U.S. Treasury would be able to meet its obligations until late July, under the debt ceiling. The new early deadline is not surprising, according to the expert, given that the Treasury's cash balance forecasts might fall as low as $25-30 billion in early June, which is typically the lowest cash level the Treasury generally uses to project its deadline. A short-term extension with parties then continuing to negotiate is now the most likely scenario, according to Goldman Sachs. 

Tensions Mount On Short-Dated Treasuries 

Despite the fact that yield levels are still a long way from pricing in the prospect of a U.S. default, investors are exhibiting the first signs of anxiety in the Treasury market. 

The SPDR Bloomberg 1-3 Month T-Bill ETF BIL is having volatile days, but the tension is spreading to short-dated notes as well. On Monday, the iShares 1-3 Year Treasury ETF SHY lost 0.45%, marking the worst trading day since June 2022.

At the time of writing, the three-month Treasury bill yield was 5.23%, the highest level since January 2001, and more than 110 basis points higher than the two-year yield. 

Chart: 3-Month T-Bill Rose to Over 20-Year Highs

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