Treasury bill yields surged Friday after surprise news that House Speaker John Boehner will resign from Congress ahead of a potential government shutdown.
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The yield for three-month Treasurys tripled in minutes, albeit from very low levels. Yields on six-month Treasurys also jumped.
Treasury bills represent government debt that matures in the very short term, and thus react to short-term fears around government funding. If the risk increases that short-term bills won't get paid off (currently seen as exceptionally unlikely), short-term yields will need to rise in order to compensate for that risk.
Experts are somewhat divided on whether Boehner's resignation would make a shutdown more or less likely. But with Treasury bills trading at yields near zero, any sniff of increased risk has the potential to create an outsized effect on that market.
Two years ago, as a debate over the federal debt ceiling led to a partial shutdown, short-term Treasury bill yields rose considerably into the event—which ended up having no effect on bills getting paid off.
Larry McDonald, head of U.S. strategy with Societe Generale's macro group, says a similar situation threatens to play out this year. He believes Congress is likely to pass a continuing resolution in the next week that will last for three months. Around the time it expires, the government will run out of cash and hit the debt ceiling, according to his research. The government will then be forced to negotiate a new continuing resolution as it runs out of money, which is what happened in 2013.
"You'll have the debt ceiling, the continuing resolution, and the December Federal Reserve meeting all within one week," McDonald said. "That means Treasury bills that mature in December are in some jeopardy."
"The shock announcement has increased the odds of a shutdown, if not this week then in early December," echoed Paul Ashworth, chief U.S. economist at Capital Economics.
The passage of a short-term continuing resolution is passed in the week ahead "would allow Congress to revisit the issue alongside the debt ceiling. Unfortunately, the new House Speaker may not want, or be able to, deliver a deal" at that time, Ashworth wrote.
Boehner plans to step down at the October, his office said Friday.