The short note

As the Washington pols act like a pack of ‘Tween girls fighting over who is not talking to who about what and the shutdown goes into its second week, a big problem is developing in the short note.

Yields on short-term Treasuries and Bills are shooting higher on the threat that default will hit this paper first and hardest.

Today corporations can borrow short-term paper cheaper than Uncle Sam.

One-month LIBOR is at 0.17 percent while the one-month Treasury bill is trading at 0.26 percent. The liquidity providers — institutional money — may chase better returns knowing the US will make good and pull out of buying short-term commercial paper.

This short paper squeeze, which is used by many corporations to fund day-to-day operations was the scenario that was the cause for the TARP bailout.

Cratering stock prices be damned, if the commercial paper market is squeezed on yield, then publicly trade companies will be showing up at the Fed window again in order to make payroll, pay vendors and roll over shorter duration notes.

This can all happen sooner than next week, look for 0.35 1-month T-Bill to be the line in the sand for the first shoe to drop perhaps as early as tomorrow.