By Harry Robertson
LONDON, May 4 (Reuters) - The yield on the three-month
U.S. Treasury bill hit a more than 22-year high on Thursday in
the latest sign of investor nerves about the debt ceiling
standoff.
Two-year yields fell sharply, meanwhile, as investors bet
that the Federal Reserve would have to cut interest rates this
year after raising them by 25 basis points (bps) on Wednesday.
The U.S. three-month T-bill yield soared to 5.55%
overnight, its highest level since January 2001, when the
Federal Reserve was cutting interest rates during the bursting
of the dotcom bubble. It was last up 16 basis points (bps) at
5.415%.
Treasury Secretary Janet Yellen said earlier this week that
the government could run out of cash as soon as June 1, with
Democrats and Republicans currently at an impasse.
At the Fed's rate decision on Wednesday, Chair Jerome Powell
said the central bank is unlikely to be able to protect the U.S.
economy from the damage caused by a failure to raise the federal
debt ceiling, saying it is a matter for politicians to resolve.
Investors have been dumping bonds that mature in the period
in which the United States could run out of money and therefore
default on its debts. That has put huge upward pressure on
yields, which move inversely to prices.
"I think they are expected to go literally to the wire
time-wise and I think we should not be surprised if we see more
nervousness, the closer we come to the deadline," said Michael
Krautzberger, head of fundamental fixed income in Europe at
BlackRock.
The two-year U.S. Treasury yield fell 8 bps to
3.864% on Thursday, just shy of its lowest in a month.
Investors are expecting the Fed to cut rates this year, even
though Powell pushed back explicitly against that prediction on
Wednesday. The Fed pushed rates up to between 5% and 5.25%.
A sharp drop in the shares of PacWest, another troubled U.S.
bank, on Wednesday added to unease about the direction of the
economy.
The 10-year U.S. Treasury yield was down 4 bps
to 3.367% after a 4 bp fall on Wednesday.
The European Central Bank sets interest rates on Thursday
and is expected to hike by 25 bps to 3.25%.
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(Reporting by Harry Robertson and Sharon Singleton)
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