The Strangest US Treasury Yield Curve in History, What's Going On?
The 3-month to 1-month T-Bill spread is the largest in history. Simultaneously we have record or near-record inversions on bellwether spreads.
US Treasury Spreads
3-month yield minus 1-month yield: +1.72
10-year yield minus 2-year yield: -0.60
10-year yield minus 3-month yield: -1.57
30-year yield minus 3-month yield: -1.37
What's Going On?
The huge inversions, led by the 10-year minus 3-month yield, are a very strong recession signal.
The record spread between the 3-month and 1-month T-Bills is an artifact of the debt ceiling.
Debt-Ceiling Standoff Warps Treasury Trading
The Wall Street Journal reports Debt-Ceiling Standoff Warps Treasury Trading
Investors are piling into ultrashort-term Treasury bills to avoid getting caught up in the debt-ceiling drama.
Surging demand has driven one-month T-bill prices higher, sending the yield down to 3.313% from 4.675% at the end of March. Bills maturing in three months yield 5.105%—a record incentive for lending to the government for a couple months more, according to Tradeweb data going back to 2001.
Gennadiy Goldberg, senior U.S. rates strategist at TD Securities in New York, attributes roughly 70% of the current distortion in the short-term Treasury market to issues related to the debt ceiling and the rest to uncertainty about the course of interest rates.
Meanwhile, the lack of government refunding has led to a shortage of Treasury bills, reducing supply and lifting prices. The Treasury’s checking account at the Fed, known as the Treasury General Account, recently declined below $87 billion, from $964 billion last May. Tax revenues boosted the Treasury’s coffers to $265 billion as of Wednesday, but that remains one of the lowest levels since 2021.
Will the Debt Ceiling Cause a Fiscal Crisis or Chaos? Two Competing Views
For a look at competing views, please see Will the Debt Ceiling Cause a Fiscal Crisis or Chaos? Two Competing Views
I offered this opinion, now backed up by hard contract data "Odds of default are somewhere between 0 percent and 2 percent. Yep, that would likely mean chaos."
Credit Default Swaps Imply a Two Percent Chance the US Defaults
Despite growing fearmongering, the perceived odds of a US default are about 2 percent.
Due to grace periods, the likelihood of a payout on a default are much lower still.
For discussion, please see Credit Default Swaps Imply a Two Percent Chance the US Defaults
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