US Treasury bill jitters lay bare investor angst

Markets grapple with the curse of living in a wonderland where rules are torn up

by: Gillian Tett

The North Korea crisis is providing new distractions for President Trump, and investigations are intensifying into his dealings with Russia © AFP

In normal circumstances, America’s Treasury bill market seems dull as ditchwater. This corner of government finance, after all, is supposed to be ultra safe; it is where stodgy asset managers park their cash.

But these days, little seems entirely “normal” in the markets — at least not with Donald Trump in the White House. Earlier this week, the yield on four-week Treasury bills suddenly spiralled towards 1.3 per cent, a dramatic move not seen since 2008.

This was sparked by fears that the Trump administration might fail to extend the American $19.8tn debt ceiling, potentially causing the US Treasury to run out of cash by early October.

Indeed, anxiety was so high that Federated Investors, the fifth-largest money market fund in America, told the Financial Times that it was too nervous to buy T-bills that mature in the danger zone, even though it normally gobbles these up. But on Wednesday, the jitters were postponed after Mr Trump cut a surprise deal with Democrat leaders to extend that debt ceiling. T-bill yields duly tumbled by more than 17 basis points, leaving them back at levels seen a month ago.

In some senses, this is good news. This week’s events have proven to investors, yet again, that Mr Trump’s bite is far weaker than his bark (or tweet). Never mind the fact that the president previously declared that the debt ceiling could only be raised if Congress funded his wall on the Mexican border. This, apparently, is now forgotten.

But on another level, what happened this week is also deeply worrying. When debt ceiling crises erupted in 2011 and 2013, T-bills did not swing like this; indeed, the last time we saw this T-bill volatility was during the financial crisis.

Thankfully, there is nothing like that occurring now. But this week’s event reveals a crucial point: today, as in 2008, the markets are grappling with the curse of living in an Alice-in-Wonderland world, a place where it is increasingly hard to price risk and uncertainty because the normal rules are being torn up.

Think about it. Back in 2008, when the subprime crisis hit, investors’ assumptions about finance were turned upside down: “safe” banks collapsed; supposedly liquid markets froze up; highly rated instruments produced big losses. Then, in 2010, this sense of Alice in Wonderland spread to economics, as interest rates turned negative. Nobody knew where the limits lay.

Now, an echo of this is occurring in politics. To be sure, parts of Washington still seem “normal”: many institutions remain strong; there are hard-headed people in the White House who are trying to promote economic reform and a steady foreign policy; the president says he is so determined to avoid debt default, that “always we’ll agree on [a] debt ceiling” increase — even if this means cutting deals with Democrats.

But the president is also acting in ways that seem increasingly capricious, unpredictable and perverse. This week, after all, was supposed to be the president’s moment to champion tax reform. But he unexpectedly grabbed headlines by focusing on immigration. Last month the president was supposed to call a press conference to talk about infrastructure reform. But this was upset by Mr Trump’s comments on events in Charlottesville.

Now Mr Trump’s team is asking Congress to prepare to pass a tax bill. But the president has also asked Congress to deliver an immigration bill in six months, potentially derailing everything else. Meanwhile the North Korea crisis is providing new distractions for Mr Trump, and investigations are intensifying into his dealings with Russia.

That makes it desperately hard for investors to price the risks about what might happen when the debt ceiling deal ends on December 15; or indeed, to price the risks of Mr Trump’s presidency in a wider sense. The Ladbrokes betting site, for example, currently gives a 50 per cent chance of him being impeached, but also names him the favourite candidate to win the 2020 US election. Punters no longer know what to rule in — or out.

Given this, it no surprise that T-bill yields swung wildly this week; nor that many asset managers are quietly hedging their portfolios; or that some business leaders who worked with the White House earlier this year are now trying to protect their reputations by criticising the president on immigration. Markets might seem outwardly calm, but uncertainty — and fragility — is building. Those none-too-boring T-bills are a canary in the Washington coal mine.

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