Posted by on July 24, 2017 3:36 pm
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Categories: Auction Auction theory Auctions Bidding Business Consumer Confidence Debt Ceiling Economy Finance Fixed income analysis High Yield Lehman Marketing Microeconomics money Money market fund Morgan Stanley Senate Shop at Bid United States debt ceiling US Federal Reserve US government Yield Yield Curve

It seems Morgan Stanley was right when they said “the debt ceiling worries us most,” as today’s 3-month T-Bill auction surprised the market with its highest yield since the fall of 2008, as investors continue to price concerns that the U.S. government will exhaust its borrowing authority around mid-October.

As SMRA details:

The 3-month bill auction stopped at 1.180%, with a 67.70% allocation at the high yield. The 3-month auction bid/cover ratio was 2.87. The average 3-month bid/cover over the past three months was 3.13. The WI was last trading at 1.165% at 11:30 AM. Indirect bidders took down 38.44% of the 3-month bill auction and Direct bidders took down 5.61%.

The 6-month bill auction stopped at 1.130%, with a 34.87% allocation at the high yield. The 6-month auction bid/cover ratio was 2.91. The average 6-month bid/cover over the past three months was 3.30. The WI was last trading at 1.115% at 11:30AM. Indirect bidders took down 40.66% of the 6-month bill auction and Direct bidders took down 2.69%.

So the 3-month bill is priced 5bps cheaper than the 6-month bill and both dramatically tailed.

As BofA noted, the early pricing of debt limit concerns may reflect overhang from this week’s bill auctions and the “greater influence” of government money market funds following October’s reforms.

But, Morgan Stanley recently warned that the biggest immediate risk to the market is:

The debt ceiling worries us most, given that action may need to be taken within as little as seven weeks. But on the other issues, we’re more relaxed. The Senate’s Healthcare bill had an approval rating of 17%, so we doubt its failure would be a hit to consumer confidence. The Special Counsel’s investigation, whatever the outcome, will likely take considerable time. Our economic baseline was already cautious with regard to fiscal stimulus, a long-held view of our policy team. And while tax cuts could boost the market temporarily, they could also lead to a more hawkish Fed, a classic ‘be careful what you wish for.’

As the 3mo6mo yield curve inverts dramatically…

Inflecting right around the mid-October date of today’s auction…

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