Supply Pressures Ease as Debt Ceiling is Raised

March 18, 2014 | By Global Liquidity

  • Supply pressures ease as Congress passes a clean debt-ceiling bill. Short-term market participants breathed a sigh of relief as the US debt ceiling was rather undramatically lifted in February, with no additional fiscal drama anticipated on this front until March 2015. With improved market sentiment, activity picked up on the front-end of the yield curve, leading to tighter spreads and higher trading volumes. However, despite a significant injection of Treasury bill supply, money market rates have not increased significantly.
  • The Federal Reserve (Fed) remains committed to low short-term interest rates. A release of the minutes from the January meeting of the Federal Open Market Committee, along with Fed Chair Janet Yellen's testimony before Congress, reaffirmed the Fed's commitment to continue tapering asset purchases even amid softer economic data releases (e.g., payroll), which are partially being attributed to bad weather. And despite suggestions by some Fed officials that the short-term rates should be raised relatively soon, the majority of participants believed continued low rates remained appropriate.

Supply Pressures Ease as Debt Ceiling is Raised - Chart


Supply Pressures Ease as Debt Ceiling is Raised - Chart


Supply Pressures Ease as Debt Ceiling is Raised - Chart


About risk

Fixed-income investments are subject to credit risk of the issuer and the effects of changing interest rates. Interest rate risk refers to the risk that bond prices generally fall as interest rates rise and vice versa. An issuer may be unable to meet interest and/or principal payments, thereby causing its instruments to decrease in value and lowering the issuer's credit rating.

Treasury securities are backed by the full faith and credit of the US government as to the timely payment of principal and interest.

Prices of equity securities change in response to many factors, including the historical and prospective earnings of the issuer, the value of its assets, general economic conditions, interest rates, investor perceptions and market liquidity.

If the seller of a repurchase agreement defaults on its obligation or declares bankruptcy, delays in selling the securities underlying the repurchase agreement may be experienced, resulting in losses.

A basis point is equal to one hundredth of one per cent.

Libor is the world's most widely followed benchmark for short-term interest rates. Fixed daily, the Libor is the interest rate at which banks in the London interbank market can borrow overnight funds from one another. It serves as a base when determining interest rates for corporations and other large borrowers. An investment cannot be made directly into an index.

The Federal Funds Rate is a volume-weighted average of rates on trades arranged by major brokers. The rate is calculated by the Federal Reserve Bank of New York using data provided by the brokers and is subject to revision. An investment cannot be directly into an index.

Effective Fed Funds Daily Rate—The Rate represents the Federal Funds Effective Rate, a volume-weighted average of rates on trades arranged by major brokers. The effective rate is calculated by the Federal Reserve Bank of New York using data provided by the brokers and is subject to revision.

The Securities Industry and Financial Markets Association Municipal Swap Index, produced by Municipal Market Data, is a 7-day high-grade market index comprised of tax-exempt VRDOs from MMD's extensive database.

Commercial paper is an unsecured, short-term debt instrument issued by a corporation. Maturities on commercial paper rarely exceed 270 days; it's usually issued at a discount, reflecting prevailing market interest rates.

Purchasing Managers Index (PMI) is an indicator of the economic health of the manufacturing sector.

iMoneyNet categories: Government (All) is a combination of Government Retail and Government Institutional categories. Government Retail composed of Treasury, Treasury & Repo, and Govt & Agency Retail funds. Government Institutional composed of Treasury, Treasury &Repo, and Govt & Agency Institutional funds. Prime (All) is a combination of Prime Retail and Prime Institutional categories. Prime Retail composed of First Tier and Second Tier Retail funds. Prime Institutional composed of First Tier and Second Tier Institutional funds. Tax-Free (All) is a combination of Tax-Free Retail and Tax-Free Institutional categories. Tax-Free Retail composed of National and State Retail funds. Tax-Free Institutional composed of National and State Institutional funds.

A credit rating is an assessment provided by a nationally recognized statistical rating organization (NRSRO) of the creditworthiness of an issuer with respect to debt obligations, including specific securities, money market instruments or other debts. Ratings are measured on a scale that generally ranges from AAA (highest) to D (lowest); ratings are subject to change without notice. For more information on rating methodologies, please visit the following NRSRO websites: www.moodys.com and select "Rating Methodologies" under Research and Ratings on the homepage. www.fitchratings.com and select "Ratings Definitions" on the homepage.

All data as of Feb. 28, 2014, unless otherwise noted.

The opinions expressed are those of the author, are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals.

All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. This does not constitute a recommendation of the suitability of any investment strategy for a particular investor.

An investment in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although a money market fund seeks to preserve the value of an investment at $1.00 per share, it is possible to lose money by investing in such a fund.

All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. This does not constitute a recommendation of the suitability of any investment strategy for a particular investor.

An investment in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although a money market fund seeks to preserve the value of an investment at $1.00 per share, it is possible to lose money by investing in such a fund.

All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. This does not constitute a recommendation of the suitability of any investment strategy for a particular investor.

An investment in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although a money market fund seeks to preserve the value of an investment at $1.00 per share, it is possible to lose money by investing in such a fund.

All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. This does not constitute a recommendation of the suitability of any investment strategy for a particular investor.

An investment in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although a money market fund seeks to preserve the value of an investment at $1.00 per share, it is possible to lose money by investing in such a fund.