August 27, 2017 / 9:27 PM / a year ago

U.S. money funds held 20 pct T-bills due to October - Citi

NEW YORK, Aug 27 (Reuters) - U.S. money market funds at the end of July held $63 billion, or 20 percent, of outstanding Treasury bills due in October, when the government faces a deadline to increase the federal debt limit, according to Citi analysts.

Yields on T-bills due in October have risen in the absence of a deal by lawmakers to raise the statutory borrowing cap, and they could rise more if members of Congress do not reach an agreement to raise the debt ceiling when they return from their summer recess next week, the analysts said in a research note published late Friday.

They noted that money market fund managers had been slow to act on their bill holdings ahead of new industry rules going into effect last year.

“Given that the MMF (money market fund) community started clearing up at-risk bill issuance just 2-3 weeks going into the reform, we may see further sales going forward,” they wrote. “Of course, some of that dynamic may be behind us since the data is as of end of July.”

On Friday, October T-bill yields ended about 8 basis points to 20 basis points higher than yields on issues maturing in September and November, Reuters and Tradeweb data showed.

Last week, the White House said it was committed to making sure Congress raises the debt ceiling, currently at $19.9 trillion, before the government is expected to run out of cash at the end of September.

If the government cannot issue more debt, traders fear, it will delay making interest and principal payments on its outstanding debt. A U.S. default could roil financial markets worldwide as investors rethink the creditworthiness of Treasuries.

The consensus view is that the debt ceiling would be increased before the government’s cash is exhausted.

Until a deal is clinched, the T-bill market is vulnerable to further selling by money funds, whose ownership of T-bills increased last year as a number of them converted into government-only funds in response to tighter regulations.

“We believe that default is highly unlikely but think the Oct bill dislocation can grow further,” Citi analysts wrote. (Reporting by Richard Leong; Editing by Andrea Ricci)

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