Escalating US Treasury Yields Reflect Intensifying Uncertainty Over Debt Ceiling Negotiations

Treasury yields are experiencing heavy volatility as a debt ceiling agreement continues to be delayed with less than a week until the U.S. government risks running out of money to make payments. On Monday night, House Speaker Kevin McCarthy said that he had a "productive discussion" with President Joe Biden over the debt limit, though no deal was struck. 

What Happened: The yield on the one-month Treasury bill, which is most sensitive to debt ceiling discussions, rose to 5.9% overnight before retracing to 5.6% as of this writing. 

Interest rates for all other bond durations increased, with the rate on the two-year Treasury Note, which is particularly sensitive to policy changes, reaching 4.4% -- the highest point since the middle of March. This rise marks the eighth consecutive session of increases.

The yield on the 10-year benchmark is also on pace to rise for the eighth straight session. Similarly, long-term rates have been on the rise, with the yield on 30-year T-bonds moving up to almost 4%, just slightly below its 4.05% highs from 2023.

The iShares 20+ Year Treasury Bond ETF TLT fell 3% last week, retracing to around $100 per unit, close to the 2023 lows of $99 per unit.

Also Read: Jamie Dimon Thinks Everyone Should 'Be Prepared' For Interest Rates Going Up From Here

Chart: A Significant Surge in Treasury Yields In May

Why Are U.S. Treasuries Falling (Yields Rising)? 

Prolonged debt limit discussions and the failure to reach a deal with only a week until the June 1 deadline is causing market anxiety at the very short end of the Treasury yield curve, which is mainly reflected in one-month and three-month yields. 

The two-year yield has risen as a result of recent hawkish Fed comments, opening the door to an increase in June (20% chance) or July (35% probability).

Long-term rates are instead starting to factor in the possibility of credit actions by rating agencies, after Moody's and Fitch said that debt-ceiling brinkmanship may have potentially negative credit consequences.

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