There is a kink developing in the U.S. money-market curve, with 4.29% one-month T-bill rates now below the 4.30% three-month rate and on the verge of breaching the Federal Reserve’s repo-facility award rate of 4.25%.
This kink is most likely a byproduct of the rising concern over the potential of a government shutdown. Congress must act by midnight on March 14 to avoid a shutdown.
That standoff will be followed in the months ahead by another potential showdown over raising the nation’s debt ceiling.
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Investors are looking at the risk of not getting paid, with the demand for bills maturing in one month offering a greater dose of safety relative to bills expiring later in the year.
As such, there is higher demand for one-month bills, which is driving the one-month rate lower. At the same time, there is a lower demand for three-month bills, with investors looking for higher rates of return to compensate for the risk of not getting paid on time.
Two years ago, the threats of a government shutdown caused similar disruptions.
This can be seen in the wild swings in rates for one-month bills beginning in March 2023 that accompanied an increase in money-market funds parking their assets in the safety of the Fed’s overnight repo facility.
