A looming debt-limit crisis is causing yield anomalies.
By David Enna, Tipswatch.com
In looking over this week’s auctions of Treasury bills, I noticed something unusual, but also predictable: The looming debt-limit crisis is beginning to send tremors through the short-term Treasury market.
For example, on Thursday I posted these results on X:
It’s unusual to see a 41-basis-point spread between the yields of a 4-week versus 8-week T-bill, on the same auction day. For example, on May 13 the 4-week auctioned at 4.293% while the 8-week was 4.322%, only a 3-basis point spread. That’s normal. A 41-basis-point spread is a strong indication that investors are pouring into the 4-week and shunning the 8-week, which will mature August 26, 2025, potentially in the middle of a Treasury funding crisis.
And then, also Thursday, Treasury issued $60 billion in an unusual 77-day cash management bill, which will mature Sept. 16, potentially beyond the crisis. The usual CMB size recently has been $50 billion and the term has been 14 days, sometimes 42 days. Treasury gave very specific reasoning for the change:
As noted in the May 2025 Quarterly Refunding Statement, until the debt limit is suspended or increased, debt limit-related constraints will lead to greater-than-normal variability in benchmark bill issuance and significant usage of cash management bills (CMBs).
Beginning with a CMB auction announcement on June 24, 2025, Treasury expects to issue a series of CMBs over the next month for up to $250 billion in aggregate. Each of these CMBs will mature on a Tuesday or Thursday in the second half of September. … Treasury expects that issuing these CMBs will at least partially offset the anticipated reduction to the net supply of Treasury bills associated with shrinking 4-, 6-, and 8-week benchmark bill offering sizes.
Technically, the debt-limit crisis has already begun. Since Jan. 21, Treasury has been using extraordinary measures to finance the government. And it has noted, “Treasury is not able at this time to provide an estimate of how long its cash and extraordinary measures may last.”
The expected “X-date,” as it is called, is likely to hit between Aug. 15 and Oct. 3, according to the Bipartisan Policy Center. As Aug. 15 approaches, you can expect to see anomalies popping up in T-bill auctions for issues that will mature during the potential shutdown.
We’ve seen this before
The anomalies will take two forms: 1) sharply lower yields on 4-week T-bills as long as the crisis remains more than 4 weeks away, and 2) sharply higher yields on longer-term T-bills that will mature in the “danger zone.” Eventually, as the X-date gets very close, investors will demand higher yields on the 4-week, too.
In 2023: The chart shows the dramatic disruption of the 4-week T-bill, with yields falling sharply at the same time the 13-week yields were rising. Once the debt limit crisis X-date reached one month away, the 4-week yield soared above the 13-week.
In 2025: At the far right of the chart, you can see the beginning of the predictable pattern: The 4-week yield is falling while the 13-week yield is rising.
I wrote about this back in April 2023, and included this chart showing the divergence in yields a month-plus before the crisis was resolved:
This chart, from the Treasury’s Yields Curve estimates page, shows that the 4-week T-bill’s yield fell 120 basis points in three weeks, while the 8-week was up 8 basis points and the 13-week up 19 basis points. The same is true across the T-bill spectrum — every issue except the 4-week saw yields rise in April 2023.
This disruption is routine because of the strange way the United States handles its debt limit, forcing a periodic crisis (and eventual resolution). This is a 2023 chart from Moody Analytics:
So far in June 2025, the T-bill disruption is just beginning, but it will step up in coming weeks if the debt limit is not increased:
In a normal market, the 4-week T-bill’s yield should be very close to the effective Federal Funds rate, which currently stands at 4.31%.
This is not a ‘crisis’
The issue could be resolved in the next week, if Senate and House Republicans can get near 100% agreement on President Trump’s “Big Beautiful Bill.”
In most versions of this funding farce, you had Republicans controlling at least one house of Congress, combined with a Democratic president. In only takes a handful of members of Congress to set off the crisis, usually as an attempt to to gain spending-cut concessions. Eventually, a compromise is reached.
In 2017 and 2018, under Trump, the debt limit was increased without much fanfare.
In 2025, you have a Republican Congress and a very powerful Republican president who will demand that the crisis be avoided. (Trump wants the debt limit to be abolished, a stand he shares with Sen. Elizabeth Warren.) Democrats won’t offer to “help out,” but the debt limit has never been an issue for them.
Trump’s Big Beautiful Bill, if passed, would resolve this problem by increasing the federal statutory debt limit by $5.1 trillion. The New York Times noted on June 19:
The national debt is approaching $37 trillion. This week, Senate Republicans unveiled legislation that would raise the debt limit by $5.1 trillion, higher than the $4 trillion increase that House Republicans voted for in their bill last month. Such an increase would likely extend the nation’s ability to borrow into 2028.
An increase of that magnitude would be a record and underscore the ideological flexibility that many Republicans are willing to embrace when they are in power.
In essence, a $5.1 trillion debt-limit increase would push any future crisis out of Trump’s presidency, an idea he supports. (It also provides evidence of large U.S. deficits triggered by this bill over the next few years.) Some Republicans, including Sen. Rand Paul of Kentucky, oppose the lengthy increase. Instead, Paul suggests suspending the debt limit by three months.
The Big Beautiful Bill seems likely to gain approval, as long as nearly every Republican follows the president’s wishes. But when? Trump wants the bill on his desk by July 4, but any snag in House-Senate negotiations could delay final passage. Beyond July 4, the X-date crisis clock will begin ticking.
It would be possible to separate the debt limit issue from the overall spending bill, but that might require concessions to Democrats. If the Big Beautiful Bill stalls (it probably won’t) then emergency action will be needed.
What happens in a debt-lock?
I don’t think the U.S. is going to default on its debt, but there’s a slight possibility we will see a short-term government shutdown and disruption to government payments. No one knows exactly how this would play out.
The Brookings Institution in 2023 issued a paper titled, “How worried should we be if the debt ceiling isn’t lifted?” The authors noted that the U.S. government created a contingency plan in 2011 at the height of a similar crisis:
“Under the plan, there would be no default on Treasury securities. Treasury would continue to pay interest on those Treasury securities as it comes due. And, as securities mature, Treasury would pay that principal by auctioning new securities for the same amount (and thus not increasing the overall stock of debt held by the public). Treasury would delay payments for all other obligations until it had at least enough cash to pay a full day’s obligations. In other words, it will delay payments to agencies, contractors, Social Security beneficiaries, and Medicare providers rather than attempting to pick and choose which payments to make that are due on a given day.”
On Thursday, we saw the Treasury launch a plan to issue $250 billion in longer-term cash management bills in coming weeks. This is a logical strategy, pushing maturities beyond the potential X-date. At the same time it reduced Thursday’s 4- and 8-week auction sizes by $5 billion each.
Most likely, this all gets resolved in the next 5 to 10 days. But as the X-date approaches, we will see worsening disruptions to the T-bill market. People will begin asking: “Is the government going to shut down?” … “Will my T-bill mature and pay out on the predicable date?” … “Is my Social Security benefit payment going to be delayed?” … “Will there be a TIPS auction this month?”
The debt crisis will be resolved, either through the Big Beautiful Bill or through emergency congressional action. As an investor, I would not hesitate to invest in a Treasury T-bill, despite the potential disruption.
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