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Prospect of debt deal takes pressure off short-term Treasury market

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As stocks rallied on optimism for a debt deal, traders bid up close-dated Treasury bills, a highly volatile corner of the bond market that looked most fearful of a U.S.default.

Yields on Treasury bills that mature in October—a small but widely watched subset of the market—have been moving dramatically this week. The Oct. 31 dated bill hit a high yield of 0.65 percent Tuesday morning but fell to 0.3 percent by late morning and then to 0.22 percent after Senate leaders announced a compromise bill to reopen the government and avoid the debt ceiling. It had been yielding 0.25 percent Tuesday morning.

"The last hurdle is to see it actually pass the House. It looks to be a very low probability that it won't pass," said John Briggs, who heads cross asset strategy at RBS. Traders had been selling October dated Treasury bills ahead of the midnight deadline for the U.S. to reach its debt ceiling.

"You probably could see another 10 basis points come out of the October bill yields," he said. He noted Nov. 20 bills, auctioned Wednesday morning also rallied.

"The Nov. 20 four-week bill auctioned at 0.24, and it's now 0.135," he said.

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