Republican Budget Brinkmanship Leads to Inverted Treasury Yield Curve
NEW YORK ( TheStreet) -- Treasury Bills issued by the U.S. government due in November carry a lower implied yield than those due at the end of October, as a government shutdown and possible default on the Treasury's obligations begin to panic short-term debt markets
On Tuesday, the Treasury sold $30 billion in one-month bills at a rate of 0.35%, a yield not seen since the depths of the financial crisis in 2008. The rate roughly doubled from Monday levels and means that U.S. government debt due in November carries a lower yield than debts due at the end of October.
In other words, the yield curve on Treasury Bills has inverted .
A scenario where some would rather lend money for a longer time and at a lower yield than debts due in late October, when the Treasury is projected to reach the legal federal debt limit, signals that wrangling over the government's finances is causing a sharp shift in investor behavior.
Weak demand for the Treasury's auction of one-month bills also could signal growing fear of a default.
"Another indicator of stress: Treasury yields are now inverted at short maturities," Donald Marron, Director of Economic Policy Initiatives at the Urban Institute and a former member of the President's Council of Economic Advisers, wrote on Twitter.
Inverted yields in short-term debt markets often signal wider issues throughout credit markets.
At certain points in 2007, short term interbank rates surged above those for longer terms. For instance, in August of 2007 the rate for one-month LIBOR exceeded the three-month, six-month and 12-month LIBOR rates.
In retrospect, we now know that inverted short-term LIBOR rates were a clear sign of a rising perception of counterparty risk throughout the financial system and a shortage of liquidity as investment banks tried to fund dollar-denominated mortgage securitization vehicles that previously had been off of their balance sheets.
The Federal Reserve and European Central Bank were forced into action that August; however, inverted short-term LIBOR rates persisted through March of 2008 when Bear Stearns was rescued by JPMorgan and a Fed backstop.
A yield surge on the newest issue of one-month and three-month government debt on Tuesday isn't likely related to any cash crunch, however, concerns about U.S. credibility appear to be taking hold.
Some buyers of U.S. government debt have stepped to the sidelines for the moment, likely as a result of fear that Congress may not be able to resolve a Republican-led impasse over the debt ceiling. If the U.S. were to default on debt payments, subsequent debt auctions would likely have even worse results and carry higher yields.