New York: Treasury traders are bracing for their own outbreak of March madness, with a plethora of risks on the radar, including the coming reinstatement of the US debt ceiling.
March 1 marks the final day of the borrowing cap’s suspension, and the limit’s return will start the countdown until America runs out of so-called extraordinary measures to keep the government funded. Friday is also the official deadline for an increase in US tariffs on goods from China, although progress in negotiations indicates that could well be delayed.
Even before that, the market has to navigate several obstacles, in particular Congressional testimony from Federal Reserve Chairman Jerome Powell — who could provide more colour on the central bank’s dovish pivot — and US Trade Representative Robert Lighthizer.
While the first months of 2019 have had their fair share of market-moving headlines, the Fed’s recent shift away from an aggressive tightening trajectory has helped to quell fluctuations in Treasuries. The Bank of America Merrill Lynch MOVE Index — a gauge of anticipated swings — has fallen to less than 47 from more than 68 in December. And the 10-year yield, currently around 2.65 per cent and within 12 basis points of its January low, has held in a narrow range for much of this year.
“It will be an interesting week,” said Zachary Griffiths, a rates strategist at Wells Fargo Securities, pointing to Friday’s deadline for both the debt ceiling and tariffs. “And anytime Chair Powell is speaking, there is always risk that things can be more volatile if the market latches onto certain phrases.”
On the debt-ceiling issue, there are some signs of wariness in the short-term interest-rate market. Traders expect that US Treasury Secretary Steven Mnuchin will, as he has in the past, draw upon extraordinary measures to keep the government within its statutory borrowing capacity for some time beyond March 1.
But those will run out eventually if Congress fails to either lift or suspend the debt cap, and some estimate that the exhaustion point could come around August. That in turn could affect demand for securities that mature right around that time, and yields on bills maturing then are already showing some dislocation.
There has also been some softness in demand at six-month bill offerings of late, and that may once again be tested when the government sells debt at that tenor on Monday, kicking off a big issuance week that has at least $226 billion (Dh829 billion) in Treasuries on the auction block.
That said, the exact time frame for when borrowing capacity might be exhausted remains fluid, especially because the administration’s tax overhaul has created additional uncertainty around Internal Revenue Service receipts. And in the meantime, there are plenty of risks up close to occupy investors’ attention.
Scott Skyrm, vice president at Curvature Securities, said he’s clearly focused on the coming month.
“There’s a good chance something happens in March,” he said. “There could be a big economic number that goes one way or another, or maybe it’s something in China. Or people are gearing up for some type of Fed announcement like a change in the QE roll-off.”