Tags: debt | Treasury | market | default

Treasury Market Reeling From Debt Default Conflict

By    |   Thursday, 10 October 2013 12:52 PM

A look at the stock market may suggest investors are remaining relatively calm about Washington's antics, but the Treasury bill market shows investors' confidence has started to fracture.

Treasury bills are short-term debt instruments the U.S. government issues to keep cash flowing. Investors purchase the bills at a discount, then 30, 60 or 90 days later the government repays them at par value.

Market participants have such confidence in the integrity of this system that The New York Times compares it to trust in reliability of a dollar bill.

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But things are getting scary, according to The Washington Post. Activity in the Treasury bill market in recent days "looks like the early phase of a liquidity crisis" as people are starting to shun the short-term debt.

Investors are moving money out of this market, which The Times values at $1.7 trillion. And The Post says reports are rolling in that some of the world's biggest money managers are starting to avoid short-term U.S. debt.

Like the government, banks and major corporations use Treasury bills to keep their financial systems flowing smoothly. These firms park money in the debt market and use it as collateral to borrow cash or to make other transactions.

One major firm in this market, Fidelity Investments, has said it will not accept debt around the expected default date, The Times notes.

Clifford Corso, chief executive of Cutwater Asset Management, facilitates these types of transactions, and he confirms that other institutions are starting to reject Treasury bills due in October and November.

He explained that the fear is not so much about never getting paid; rather market participants fear payments will not be issued as promised.

"So much of the world relies on that certainty of date of payment. That chain is a very large and dangerous one to monkey around with," he says.

"These bills are like the center of gravity for the financial universe — they really are," Lee Sachs, a former Treasury official who now runs the lending firm Alliance Partners, tells The Times.

"Defaulting on these would be like the laws of physics being repealed," he adds.

The mere threat of dysfunction is already reversing the mechanics of the market.

Normally, the closer bills are to the repayment date, the more they are worth as the money is viewed increasingly certain. In the case of bills for October and November, the value is currently dropping. As a result, interest rates are soaring.

From the close of the market Monday to Tuesday afternoon interest rates had almost doubled, says The Post. And The Times says data from the Federal Reserve show that the U.S. government now has to pay three times what the average AA-rated American company pays to borrow money for a month.

Paul Schott Stevens, heads of an industry group for mutual funds warns "investors will learn a lesson that cannot and will not be unlearned" from any delay in Treasury payments, according to The Times.

"That lesson is simple: Treasury securities are no longer as good as cash."

Editor’s Note: 5 Phases of a ‘Retirement Heist’ Exposed (See Video)

Related Stories:

Shutdown, Default Threat May Give Treasurys a Short-term Lift

BlackRock's Tucker: Default Might Spark Treasury Sell-Off

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A look at the stock market may suggest investors are remaining relatively calm about Washington's antics, but the Treasury bill market shows investors' confidence has started to fracture.
debt,Treasury,market,default
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2013-52-10
Thursday, 10 October 2013 12:52 PM
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