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April 24 (Reuters) - Rising concerns that the U.S.
Treasury Department could hit its debt limit in the coming
months are leading investors to shun certain Treasury bills and
pour into others as they seek out low risk places to park cash.
Congress will need to raise the U.S. debt ceiling or risk a
catastrophic debt default, with analysts predicting the Treasury
is most likely to run out of funds in July or August.
As a result, some investors are avoiding debt that comes due
in this timeframe. But they are also seeking safe places to park
cash. That has led one-month bill yields to tumble, and the
spread between one-month and three-month bills to expand to its
widest level since the one-month bills were introduced in 2001.
"You're seeing this demand for the very front-end … and
then the three- to four-month part of the bill curve is quite
cheap because of these debt ceiling concerns," said Subadra
Rajappa, head of U.S. rates strategy at Societe Generale in New
York.
"There's a lot of cash on the sidelines. Money left the
regional banking systems and made it to the larger banks and
then from there to money market funds. Money market funds are
the highest they've been and there's a dearth of supply,"
Rajappa added.
The failure of two regional banks, including Silicon Valley
Bank in mid-March, has increased demand for Treasury bills on
concerns about the safety of uninsured bank deposits. But the
Treasury has cut its issuance of short-term debt as it bumps up
against its debt limit.
"The market is nervous and is avoiding the debt ceiling
issues and has unfortunately nowhere to go because bill supply
continues to be cut," said Gennadiy Goldberg, a senior interest
rate strategist at TD Securities in New York.
Yields on one-month bills were last at 3.362%.
after reaching 3.206% last Thursday, the lowest since Oct. 20.
They are now trading around 130 basis points below the Fed funds
rate, the largest gap since 2008. Yields on three-month bills , meanwhile, have
increased to 5.113%, and are holding just below a 22-year high
of 5.318% reached on Thursday. The gap between one-month and
three-month bills has widened to a record at around 175 basis
points.
The Treasury is expected to increase bill issuance once the
debt ceiling is raised. Until then, investors are also likely to
continue to make use of the Federal Reserve's reverse repurchase
agreement facility, which is seeing daily demand of around $2.25
trillion.
(Additional reporting by Stefano Rebaudo in London; Editing by
Alex Richardson)
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