The USA is having another debacle concerning the debt ceiling.
With a split congress, ultimately you’re going to see a game of “chicken” play out and in the lead-up to this, will have financial consequences involving a lot of volatility.
This specifically involves the short end of the US yield curve:
Why is the short-term treasury bill trading at a good 100+ basis points under the Fed Funds Rate?
It is because everybody is cramming that tenor because the public has no idea when the treasury has to stop borrowing money – possibly in June, could go up to September if you believe the headlines.
So imagine if you’re holding onto one of these treasury bills maturing on June 15, 2023 and you are depending on the cash that comes for a major transaction on June 16, 2023.
Ordinarily you could depend on the treasury bill being just as good as cash, so you have optimized your cost of capital pretty good.
Unfortunately, now there is a chance that the US treasury is going to tell you, “Oops, we hit the debt ceiling and we can’t give you the cash. We’ll give it to you when Congress lifts the debt ceiling. Good luck!”. This is otherwise known as a default.
So today you have about 7 weeks of notice. What do you do? Sell the treasury bill today and get your cash before you’re stuck with a piece of paper that can’t be converted into US dollars (at least at the face value of the note – somebody will likely take it at a discount). You know that the USA is good for paying May-dated paper, so you bid for one of those treasury bills. This is why they are trading at yields significantly less than the 3 month tenor.
What will happen is you will see the demand for US currency rise as players across the entire planet face the same issue.
This will also cause spinoff effects on equities if it continues. I suspect volatility will rise in the short term going forward.