As Congress debates the debt ceiling, investors are closely monitoring the yields on short-term Treasury bills to assess market stress and risk. However, to fully understand the severity of the current situation, it's important to consider the historical context. Looking back at previous episodes dating back to 2011, the stress points appear relatively small. While it's essential to be mindful of how Congress will resolve the debt ceiling issue, the numbers we're currently seeing don't indicate significant stress or fear.

Though a potential default could exacerbate yields by hundreds of basis points, it is highly unlikely unless credit agency downgrades the treasury ratings. Many investors are de-risking their portfolios and focusing on defence, avoiding some July and August maturities but going further out in duration, such as into September and October. It's also worth noting that the punitive returns of not getting paid interest for a day or two on a T-bill are not significant. While investors may pay a few basis points more than the average yield, it won't significantly affect their overall investment profile.

Moreover, it's essential to recognize that the average T-bill yield is trading well above the FED benchmark of 0.05%. 2-month and 6-month T-bills are trading at 4.97% and 5.3% respectively, which are hundreds of basis points above where rational markets for short-term liquidity should be. Investors should ask themselves whether it's worth paying a premium to have liquidity on a same-day basis.

The potential X date for potential default could coincide with the next big FED meeting in mid-June, leading to concerns about the FED's next steps and the economic ramifications of over a year of rate tightening. The FED is trying to reconcile financial stability, growth, and inflation, but the economy remains healthy, which is probably irreconcilable with a dovish bias. Although the market still prices in a little more than three cuts by the beginning of January 2024, it's unlikely that the Federal Reserve will respond to a double sentiment if there is data indicating wage growth continues. Even a rate pause would be detrimental to the market expectation as another hike after a pause would crack investors' confidence.

One important factor to consider is the impact on liquidity once the X date and Congressional element of the debt ceiling issue are resolved. Once there is more issuance, the Treasury needs to rebuild its slush fund, also known as the Treasury General Account, which removes liquidity from the system. This will likely diminish liquidity in the overall system as new issuance comes to the market, further hurting money supply that have seen negative growth in recent months.

In conclusion, while investors need to remain mindful of the debt ceiling debate, the stress points aren't significant when viewed in a broader historical context. As long as investors are comfortable taking a little more liquidity risk, the fear is likely to be somewhat benign. Investors should consider other opportunities within the landscape that yield five and a half to six percent, which are still high in quality.