2023-05-26 07:00:00
NEW YORK (Archyde.com) – Fears are mounting among financial institutions as the U.S. federal government runs out of money on June 1, which is known as Day X. While some traders are avoiding U.S. Treasuries that mature in June, others are preparing to deal with default-risk bonds.
U.S. Treasuries are widely used as collateral across the market, and what will happen to those bonds if the debt ceiling negotiations fail to reach an agreement by Day X and the Treasury becomes unable to redeem or pay interest on them? is the focus of the market.
In the repo market, where banks and money market funds (MMF) exchange short-term funds with bonds as collateral, some banks are said to be avoiding Treasury Bills (T Bills), which mature in June. A company executive said. There are 14 T-bills that will mature in June.
Scott Skiarm, executive vice president of repos at Curvature Securities, said some participants won’t receive the T-bill, which expires in less than a year. The market began to show stress in early May.
“[Senders]will not want to deal with collateral around Day X,” said Jason England, global fixed income portfolio manager at Janus Henderson.
An executive at an independent broker-dealer that uses the repo market said it still accepts T-bills as collateral for now. At the same time, they are changing the system to anticipate actions taken by the Federal Reserve and the Treasury to prevent defaults, the people said.
At least three of the banks participating in the New York Fed’s open market operations are accepting all T-Bills, sources familiar with the matter said.
In December 2021, a group of experts drafted a plan for the Treasury Department to extend the maturity date to delay payments on maturing securities. The securities can then be traded and settled through the FED Wire Securities Service.
But experts warn that this will require many broker-dealers to adjust their trading systems, and that the consequences of late payment of securities will still be severe.
The broker-dealer executive said it would be a cumbersome process, saying that “basically, you have to break your own system” to accommodate the extended maturity. But a default would have worse consequences, he said.
（Gertrude Chavez-Dreyfuss, Saeed Azhar and Davide Barbuscia記者）
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