Some investors are getting nervous that the United States may have to delay debt payments due in February and March, as negotiations in Washington over how to cut spending and raise the debt ceiling again look likely to drag out until the last minute.
That nervousness is showing up in falling prices for Treasury bills due in that time period.
The U.S. Treasury said Wednesday it was temporarily tapping the retirement funds of government workers to avoid hitting the $16.4 trillion debt ceiling. It has said it can only stave off default through such extraordinary measures until around mid-February to early March.
Market reaction to the risk of a U.S. default so far has been relatively muted, but some investors are starting to pull away from Treasury bills that mature in that time frame.
"There's been a little bit of volatility in the bill market. People are already avoiding some of the bills that expire right around the end of February and in early March," said Mary Beth Fisher, head of interest rate strategy at Société Générale in Manhattan.
Yields on some one-year Treasuries notes that mature on March 7, for example, have jumped to 10 basis points, from 2 basis points at the beginning of the year. Yields on fixed-income investments like Treasury bills rise when their prices decline.
"We're seeing not only price action but we're seeing flows that are consistent with a bit of a fear. We think the bigger risk is in the Feb 28 to March 28 zone," said Kenneth Silliman, head of short-term rates trading at TD Securities in Manhattan.
The delay in raising the ceiling is the second time investors have faced the possibility of a U.S. debt default. A standoff over the issue in mid-2011 led to Standard & Poor's downgrading the U.S. credit rating from the top AAA.
This time around, many investors may be more prepared and more averse, and some fear market reaction could be worse.
"There is real risk in financing rates rising sharply," said Michael Cloherty, head of interest rates strategy at RBC Capital Markets in Manhattan.
Some hope that lawmakers are more aware of the dangers of dragging out the debate as uncertainty threatens to harm economic growth. There are also some reports that Republicans may shift the fight from the debt ceiling to the so-called "continuing resolution." The failure to pass this measure would shut down the government, but avoid a more calamitous debt default.