The recent agreement between President Joe Biden and Speaker Kevin McCarthy regarding the US debt ceiling has helped to ease investor concerns and reduce the cost of insuring US sovereign debt against default via derivatives. The cost had previously reached levels on par with many emerging market bonds with lower credit ratings.
The agreement is awaiting a vote in the House of Representatives and has been considered a crucial procedural step towards avoiding a potentially catastrophic default. Despite Treasury Secretary Janet Yellen's warning about the department's potential cash shortage by June 6, the yield on Treasury bills maturing in early June has extended its decline, with bills due on June 6 now yielding 5.17%, down from over 7% last week.
Data released on Tuesday showed a rebound in the amount of money the US government has available to pay its bills. The Treasury's cash pile went up slightly during the previous week, providing the administration with some extra breathing room under the statutory debt limit. However, the Treasury is still working under the assumption that the government could exhaust its borrowing authority until the debt-cap accord is entirely implemented.
Congress endeavors to approve the agreement before June 5, but some members oppose the concessions made by negotiators. Nonetheless, signs of growing momentum behind the legislation indicate that it is likely to pass.
Investors tend to demand higher yields on securities that will be repaid soon after the US reaches its borrowing capacity. As such, they closely inspect the yields on the bills to determine if there are any noticeable upward distortions, which suggest an increased concern that the US could default. The yields on those maturities have since eased, implying that investors are becoming less concerned about missed payments. The Treasury's bill auction announcement confirmed that the government could auction and settle new issues on time, but it did not guarantee a timely redemption for securities maturing on June 6, according to Wrightson ICAP.
Another key area of concern for investors is the credit-default swaps for the US government, which demonstrates how investors insure themselves against non-payment. While the cost of insuring US debt has retreated, it was exceptionally high at one point, far exceeding the bonds of many emerging markets with lower credit ratings.
Investors and analysts pay close attention to the major rating companies as they are at risk of changing their views on the US sovereign rating. Fitch Ratings has already warned that it may opt to cut the country's highest credit score. Even if an agreement is made, investors will be tracking anything that the significant rating companies have to say about the situation.