GLOBAL MARKETS-Stocks jump, T-bill yields fall as US leaders say deal coming

Reuters

* Senate leaders announce fiscal agreement has been reached

* Wall Street stocks end up more than 1 pct, global stock

index climbs

* U.S. dollar up against yen

By Caroline Valetkevitch

NEW YORK, Oct 16 (Reuters) - Global equity markets rose

while yields on short-term U.S. Treasury debt fell from 5-year

highs on Wednesday as U.S. Senate leaders announced a deal to

prevent the United States from defaulting on its debt and end

the government shutdown.

U.S. Senate Majority Leader Harry Reid and Senate Republican

leader Mitch McConnell said leaders had come to an agreement,

which will reopen the government that has been shut since Oct.

1, and raise the debt ceiling until February. The House of

Representatives planned to vote on the measure later in the day.

The final passage may come after the Treasury's Thursday

deadline for being able to borrow, but news that a deal had

emerged was enough to soothe markets, which have been roiled by

the Washington impasse. U.S. stocks shot up more than 1 percent,

putting the S&P 500 just below its all-time closing high.

"It looks like we'll get through this, which brings the

(stock) market a bit of a reprieve. Not only is this a relief

rally, but we're still in an environment with a very

accommodative monetary policy, which provides a tailwind," said

Judy Moses, portfolio manager at Evercore Wealth Management in

San Francisco.

Days of political wrangling over the U.S. budget and the

debt limit also sparked substantial preparation by dealers in

government securities for the possibility of a default.

A missed coupon payment would reverberate through the

short-term repurchase market, a key source of overnight funding

for banks and other institutions that depend on the use of

Treasury securities as collateral.

That market was effectively shut when Lehman Brothers

collapsed in 2008 and endured severe strains in 2011 during the

previous debt ceiling crisis.

Some have compared the situation to the extensive

preparations to prepare technology systems for the so-called Y2K

millennium bug in 2000, as well as to the fiscal ceiling debate

in 2012.

"People were staying up all night worried about what would

happen during (the Y2K) deadline. Then nothing happened," said

David Keeble, global head of interest rate strategy with Credit

Agricole Corporate & Investment Bank in New York.

"In this case, all the switching out of T-bills and dealings

with repos would be for naught if we don't default."

The situation also resulted in much volatility in the

near-term Treasury bill market, which is more sensitive to the

debt limit.

Yields on Treasury bills that come due later this month fell

on reports of a deal, after skyrocketing in the morning.

Interest rates of bills that come due in February rose, however,

as issues over the debt ceiling again look likely to be raised

in that month.

Debate over the debt ceiling and reduced activity from the

partial government shutdown are seen as harming the economy just

as the Federal Reserve is likely to begin paring back its $85

billion-a-month bond purchase program.

Yields on bills due on Oct. 24 fell to 0.26

percent in highly volatile trading, after getting as high as

0.72 percent earlier on Wednesday. Rates on Treasury bills

maturing on Feb. 13 rose by as much as 0.14 percent

on Wednesday, up from 0.05 percent on Friday.

Also, the gaps between bid and offer prices in the

short-term rates market and the repo market increased, widening

to about 10 basis points. They normally trade around a

1-basis-point gap. Activity in the repo market was quiet,

according to brokers, because traders were waiting for the

outcome of the negotiations in Washington.

On Wall Street, the Dow Jones industrial average was

up 205.82 points, or 1.36 percent, at 15,373.83. The Standard &

Poor's 500 Index was up 23.48 points, or 1.38 percent, at

1,721.54. The Nasdaq Composite Index was up 45.42

points, or 1.20 percent, at 3,839.43.

The CBOE Volatility index, Wall Street's fear index,

fell 21 percent to 14.71 in its biggest one-day decline since

August 2011.

MSCI's world equity index, which tracks

shares in 45 countries, was up 0.7 percent at 389.82, not far

from a five-year peak of 391.54 hit on Sept 19.

Even though the consensus view among investors had been that

a deal would eventually be reached, investors have had reason to

worry.

The owners of more than 20 U.S. Treasury securities were

seen most at risk, with the Fed almost certainly the largest

holder. For a factbox, see

Citing the debt ceiling impasse, Fitch Ratings late on

Tuesday warned it could cut the U.S. sovereign rating from AAA.

Without a deal on the debt issue, the U.S. government would

by law no longer be able to add to the national debt and would

have to rely on incoming revenue and about $30 billion in cash

to pay the country's many obligations.

That money would run out quickly and the government would

start missing payments in the weeks ahead.

DEAL TALK ALSO BOOSTS U.S. DOLLAR, OIL

The dollar rose against most currencies after the

announcement in Washington. The dollar was up 0.7 percent

against the yen at 98.81. It hit a high of 98.97, the

highest since Sept 27. The dollar index was flat on the day at

80.507

Oil prices also rose on the deal talk. Brent crude futures

gained 90 cents to settle at $110.86 a barrel, while

U.S. crude oil futures gained $1.08 to $102.29.

Gold prices edged lower after the news, though losses were

limited as physical buying in Asia and the United States

emerged. Spot gold was down 60 cents, or 0.05 percent at

$1,279.64 an ounce.

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