Investors still hungry for most Treasuries
Vehicles drive by the US Treasury Building in Washington, DC.(Photo: Karen Bleier, AFP/Getty Images)
Story Highlights
- 10-year Treasury note yields 2.65%
- Treasury holds weekly T-bill auctions
- T-bills maturing Oct. 31 have biggest default risk
Despite the government shutdown and the threat of a default, investors are still buying most Treasury securities.
"One of the ironies of the shutdown and the debt ceiling debate is that demand for Treasury notes and bonds is quite strong," says Guy LeBas, chief fixed income strategist for Janney Montgomery Scott Securities.
The logic: Even if the Treasury fails to pay in October, investors will recover that payment pretty quickly. "The U.S. government still has the ability to raise funds and pay off over time," LeBas says.
FUNDS: Puerto Rico's debt woes hit muni bond funds[1]
MARKETS: How stocks are performing Tuesday[2]
That demand will be tested Tuesday
, as the Treasury auctions $30 billion of three-year Treasury notes, and Wednesday
, when the government auctions $21 billion of the bellwether 10-year T-note.
Market experts do worry about one Treasury issue: T-bills that mature Oct. 31, when the government could be in default. "The yield has doubled today, of 0.3%," LeBas says.
Traders demand higher yields when they feel that payment risk has increased. Because of that risk, some money funds are moving to cash — old fashioned dollar bills — jumbo bank CDs, and short-term IOUs issued by federal agencies not subject to debt limit risk, LeBas says.
One question is whether the Federal Reserve would lend cash to money funds against defaulted bills, ensuring that a fund that owns a T-bill will get cash when it matures. "There's no evidence they would make such a move," LeBas says. We're confident that they have backstop plans, but they wouldn't want to publicize a safety net," he says.