The interest rate on short-term Treasury bills, issued by the U.S. Treasury Department as 30, 60 or 90 day I.O.U.'s, spiked over the last two days as investors grow more concerned about a potential debt default, according to the Washington Post.
Neil Irwin reports:
Normally, the interest rate the government pays on bills is around the same as the short-term interest rates in other money markets (for example, the interest rates banks charge each other for overnight cash, or the interest rate that the Federal Reserve targets). Both of those are near zero right now, which is why on Sept. 30, eight days ago, the interest rate on Treasury bills maturing Oct. 17 was a mere 0.03 percent. Nothing, in other words.
But since then, the possibility that the Treasury might have trouble paying or might not be able to pay its bills over the next few weeks has grown -- and the interest rate has skyrocketed. It was at 0.16 percent at Monday's close. On Tuesday the rate so far has been almost double that, as high as 0.297 percent.
Reuter's Felix Simon, however, attributes the interest rate spike to market fluctuation, not "terrifying, so much as it’s just plain noisy."
If you look at the actual price action in Treasury bills, then, it isn’t terrifying in the slightest; what’s more, it’s very difficult to separate signal from noise. There’s no indication whatsoever that it’s significantly raising the US government’s cost of borrowing, and there’s not even any real evidence that what we’re looking at here reflects credit risk being abruptly inserted into the interest-rate market.
"In the real world, Treasury bills remain an absolutely safe market — and I fully expect them to continue to trade at (or extremely close to) par even if we hit the debt ceiling," he adds. "The world will get much riskier, if that happens — and in a risky world, US government debt is still going to be the safest possible asset."
(Photo: Washington Post)