Another risk for markets to consider: Debt-ceiling talks that could stretch into Fed's June meeting

Financial markets outside the Treasury-bill sector were taking a bit of a break from debt-ceiling angst on Thursday, with stock investors mostly focused on a blowout revenue outlook from Nvidia and bond traders looking to the likelihood of at least one more Federal Reserve rate hike by July.

At the heart of their thinking is the idea that the “X-date,” or when the government could fall short on funding without a debt-limit deal, might be more fluid than thought. Treasury Secretary Janet Yellen has repeatedly cited June 1 as the earliest that her department might not be able to pay all its bills, though Republicans are skeptical of that timetable.

Under a scenario in which there’s no deal by mid-June and the U.S. hasn’t yet defaulted, “I think, counterintuitively, that the Fed will still hike if the inflation outlook justifies hiking in June,” Adams said via phone on Thursday. Debt-ceiling angst has largely been contained to the T-bills sector, where rates on bills maturing from June 1-8 hovered between 6.74% to 6.86% earlier in the day, according to Tradeweb.

At Capital Economics, Ashworth, chief North America economist, said the standoff in Washington “will probably now drag on into early June,” though he added some caveats to that statement. “If the Treasury makes it through the first two days of next month, it will be close to broke and a payment could be missed at any time,” he wrote in a note on Thursday.

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