Over the past two decades, raising the US debt ceiling to borrow the funds necessary to pay for programs Congress has already approved and appropriated has become more politicized. The brinkmanship threatens the debt rating of the US Government and investors have taken notice. Two days ago, Fitch ratings placed US Government debt on negative credit watch as a deal comes down to the wire.
Treasury Bills (T Bills) that mature in early June, around the time the US Treasury Secretary Yellen has telegraphed running out of money, approached a yield of nearly 7% early in the week while the rest of the short-term yield curve clustered just over 5%. This demonstrates investors are selling T Bills maturing in early June out of fear they may experience delays in payment. This behavior is logical as anyone buying these T Bills would require a much higher rate of return to endure the potential risk of not receiving interest promptly.
In 2011, the US Treasury created a tentative plan in case of a technical default. The Treasury would prioritize paying interest on US debt while ignoring all other obligations. This would avoid a debt default and place pressure on Congress to act. If a debt ceiling deal is not reached, which we believe is unlikely, the most probable course of action for the US Treasury is following the tentative plan.
Client portfolios are invested in an ETF (BILS) that owns T Bills maturing in 3 to 12 months thereby avoiding the uncertainty of the next several weeks. We are comfortable owning these maturities especially in the face of potential fallout from any debt ceiling drama which could include a downgrade of US debt even if a deal is reached in time. While we expect calmer heads to prevail in Congress, we can’t help but be reminded of the backhanded quote sometimes attributed to Winston Churchill that “the United States always does the right thing, after every other option is exhausted.”
Enjoy the long Memorial Day holiday.