(Adds context, CDS prices, analysts)
By Karin Strohecker, Dhara Ranasinghe and Davide Barbuscia
LONDON/NEW YORK, April 20 (Reuters) - Market jitters
over the U.S. debt ceiling lifted the cost of insuring exposure
to its debt to the highest level in over a decade on Thursday,
while JPMorgan warned of a "non-trivial risk" of a technical
default on U.S. Treasuries.
A showdown over U.S. government efforts to raise the $31.4
trillion debt ceiling for the world's largest economy has sent
jitters through global financial markets. Some U.S. Treasury
bill yields have hit fresh highs on fears that the deadline to
raise the borrowing limit may come sooner than expected.
Spreads on U.S. five-year credit default swaps -
market-based gauges of the risk of a default - widened to 50
basis points, data from S&P Global Market Intelligence showed , more than double the level in January.
The cost of insuring U.S. debt against default for one year stood at over 100 basis points as of Wednesday,
according to Refinitiv data. This is well above 2011 levels,
when a standoff over the debt ceiling triggered the first credit
downgrade of the U.S. government.
Meanwhile, yields on U.S. T-bills, the most sensitive to the
debt ceiling debate, again pushed higher, with three-month
T-bill yields hitting a new 22-year peak of 5.318% .
JPMorgan said in a note published late Wednesday it expected
the debt ceiling to become an issue as early as May, and that
the debate over both the ceiling and the federal funding bill
would run "dangerously close" to final deadlines.
The bank's U.S. rates strategy team expects the Treasury
could run out of available resources by mid-August.
"Signs of stress typically start in the T-bill market 2-3
months before the X-date given money market funds (MMF), which
are large holders of T-bills, will begin to more actively
advertise that they don't hold any bills that mature over those
dates," JPMorgan said.
TAX FLOWS
Investors are closely watching the Treasury's 2022 tax
filing season receipts to determine revenues. Tax collections
brought total deposits into the Treasury General Account at the
Federal Reserve to $283.53 billion on Tuesday, with a closing
balance of $252.55 billion after withdrawals.
"Today is another big day to watch as it will capture a
portion of Tuesday's deadline day tax flows, yet to be
reported," Deutsche Bank said in a note on Thursday, adding that
the overall total was softer than some initial assumptions.
Weaker-than-expected tax collections earlier in April
indicated that the government could exhaust its ability to pay
all of its obligations - the so-called "X-date" - sooner than
previous August forecasts, unless the federal debt ceiling is
raised, some analysts have said.
Recurring legislative standoffs over debt limits in the last
decade have largely been resolved before they could ripple out
into markets, but some investors worry the Republican party's
narrow majority in Congress could make it harder to reach a
compromise this time.
Republican U.S. House Speaker Kevin McCarthy on Wednesday
unveiled a plan to raise the borrowing limit by $1.5 trillion
and cut federal spending by three times that amount.
President Joe Biden has said that Congress should raise the
$31.4 trillion debt limit without conditions, as it did three
times under his Republican predecessor, Donald Trump.
"The serious beginning of the discussion to avoid a
technical default is encouraging news," BMO Capital Markets
Strategists said in a note.
"Our baseline cynicism leaves us skeptical of any agreement
being struck before the 11th hour."
(Reporting by Karin Strohecker and Dhara Ranasinghe, Davide
Barbuscia, editing by Kirsten Donovan, Megan Davies and Richard
Chang)
Messaging: karin.strohecker.reuters.com@reuters.net))
