One corner of the Treasury market is worried the U.S. government could default this fall, even though many strategists believe Congress will raise the debt ceiling just in time.
The Treasury bill that comes due in October has been selling off, and is currently yielding more than the bills that mature in September and November, amid concerns the government would hit the debt limit at the beginning of October and not have funds to pay investors.
While Congress is expected to act to raise the debt ceiling — the legislative cap on how much the government can borrow — it isn't expected to forego its usual drama.
"I think we will ultimately see a resolution, but it would not surprise me to see this go down to the middle of September, end of September to get this done. They [bills] could cheapen more," said Mark Cabana, head of U.S. short rate strategy at Bank of America Merrill Lynch.
The Treasury bill due Oct. 12 was yielding 1.08 percent Tuesday, while the Nov. 9 bill was yielding less – 1.03 percent. The September, 1-month bill, was yielding 0.99 percent. The normal progression is that the later-dated bills would yield more. Analysts say the November bill is yielding less than the October bill because the market believes any issue would be quickly resolved.
"We now have Congress in recess. They're not expected to come back until Sept. 5. At that point, there's only 12 days when the House and Senate are jointly in session," Cabana said. "The market is right to price in some potential that things could go wrong, but our baseline is it will not get to that point and we will see some resolution."
Congress suspended the debt ceiling in November 2015 for 17 months, ending in March. Since then the Treasury took extraordinary measures to fund the budget deficit, but it is expected to run out of capacity by early October. Treasury Secretary Steven Mnuchin has warned Congress it has to raise the ceiling by Sept. 29.
Stocks, meanwhile, have shrugged off any concerns so far, though strategists have September in their sights for potential turbulence if Congress does not show signs of moving forward ont the debt ceiling. Both the Dow and S&P 500 hit new highs during Tuesday trading.
"There's a slight risk it could become a broader market issue if there's concern that there's dysfunction on a core issue like this," said Tom Block, Fundstrat Washington policy strategists.