Costs of insuring short-term U.S. bonds rises on debt ceiling worry

Reuters

LONDON, Oct 2 (Reuters) - The cost of insuring one-year U.S.government bonds against default rose 5 basis points to 35 basispoint on Wednesday, above the rate of insuring five-year debtfor the first time since July 2011, according to data fromMarkit.

One-year U.S. credit default swaps were at their highestsince August 2011. Five-year CDS fell 1 basis point to 31 basispoints. Both rates remain very low, however.

In normal circumstances, it is costlier to buy longer-termcredit protection and yields on longer-dated debt are usuallyhigher than on bonds maturing in the near future.

So the current curve inversion - considered a classic signof credit stress - reflects investor concern over whether theUnited States would be able to raise the debt limit in comingweeks or risk a U.S. default that could roil global markets.

"It's down to the whole debt ceiling debate as it raises thepossibility of the U.S. defaulting, missing a payment. It'sunlikely but there is still that near-term risk," said GavanNolan, head of credit research at Markit.

President Barack Obama and congressional Republicans came nocloser to ending a standoff on Tuesday that has forced the firstgovernment shutdown in 17 years and thrown hundreds of thousandsof federal employees out of work.

Just before the U.S. open, the benchmark 10-year Treasuryyield was slightly lower on the day at 2.6391 percent.

The market impact from a stalemate over the federal budgetwas mainly seen at the short-end of the maturity curve afterTuesday's one-month bill sale got the highest rate sinceNovember.

S&P futures were pointing to a lower open on WallStreet, supporting Treasury prices.

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