The U.S. Treasury market has been surprisingly mundane during a month when the government partially shut down for lack of continued funding, and a potential default on U.S. debt and other obligations looms just seven days away.
The stock market is taking this crisis seriously, but the Treasury market seems to be saying: ‘Ho hum. We’re the safe haven. Bring it on.’ So, at a time when bonds are nearly universally scorned as an investment, TIPS have outperformed stocks in the last one- and three-month periods, as these charts show:
All this indicates that the Treasury market still isn’t taking the threat of default seriously, but the stock market sees the shutdown as potentially harming the economy and cutting into corporate profits. Also, stocks had a mighty run leading into this crisis, while TIPS and Treasurys had been hammered by climbing interest rates.
There’s a 30-year TIPS auction coming up Thursday, Oct. 24, 2013. It will be a reissue of CUSIP 912810RA8, which carries a coupon rate of 0.625%. This one will be going off at a substantial discount, because this TIPS currently trades with a yield of about 1.378% and sells at a price of about $81.28 for $100 of value.
Some readers have told me they were expecting this yield to rise dramatically as the auction approaches in the middle of a crisis. However, that hasn’t been happening (and there could be some sort of temporary solution before the crisis actually arises). Here is the yield trend for a 30-year TIPS:
- Jan. 2, 2013: 0.47%
- Feb. 1, 2013: 0.58%
- Mar. 1, 2013: 0.52%
- Apr. 1, 2013: 0.58%
- Jun. 3, 2013: 0.95%
- Jul. 1, 2013: 1.28%
- Aug. 1, 2013: 1.40%
- Sep. 3, 2013: 1.54%
- Sep. 5, 2013: 1.64%
- Oct. 1, 2013: 1.39%
So after hitting a high of 1.64% on Sept. 5, the 30-year TIPS yields has been trending downward, about 25 basis points in all. This drop has coincided with the funding and default crisis in Washington.
If there actually were a default on U.S. debt, and bond holders did not receive interest payments and matured principal (highly unlikely, I’d say), then everything would change. First of all, short-term lending would freeze up, and there’s already some anxiety building about that prospect. From a Wall Street Journal story:
Yields on some Treasury debt are rising and the price to borrow cash against Treasurys is climbing as some lenders are unwilling to accept U.S. debt securities maturing in late October and early November as backing for their loans. …
The prospect of a U.S. default in coming weeks has prompted many banks, securities dealers and money-market funds to sell any U.S. debt that they believe bears default risk, including securities that would be used as collateral for repo loans.
BlackRock’s Matt Tucker, head of iShares fixed-income strategy, said in a CNBC interview this week that an actual default could lead to a sell-off in Treasurys. That didn’t happen in the 2011 debt crisis, when Treasurys soared as a haven investment. From the CNBC account:
“The difference here is that in 2011, we had a lot of concern about what was happening in Washington. This triggered a flight to safety, and Treasurys rallied,” Tucker said. But, he added, “if we actually saw a default, whether it was a technical or otherwise default by the Treasury, that could be a very different reaction. You actually could see a more mixed response from Treasurys, even a selloff.”
Today’s news seems to indicate some softening on both sides, which could lead to at least a short-term resolution of the debt-limit issue, if not the shutdown. The Wall Street Journal is reporting: “GOP to Unveil Temporary Increase to Debt Ceiling.”
The measure, which runs through Nov. 22, deals with just one of two major components of the spending standoff. It doesn’t reopen the government, which has been partially closed for 10 days, leaving that question to additional deliberations between lawmakers and the White House over government spending.
Interesting side note: The U.S. Treasury will formally announce the reopening of the 30-year TIPS on Thursday, Oct. 17, 2013, the very day the debt-ceiling crisis is supposed to go ‘live.’ How ironic. We’ll be watching.