U.S. short-term rates rally on reports of debt deal


NEW YORK, Oct 16 (Reuters) - Yields on U.S. Treasurysecurities due this month fell from five-year highs on Wednesdayon reports that U.S. Senate negotiations to raise the country'sdebt limit are nearing completion.

A Senate Democratic aide said that a deal could be announcedsoon.

The reports caused short-term debt yields to fall after adramatic selloff earlier on Wednesday, as fears that lawmakerscould let negotiations drag on increased aversion to debt atrisk of delayed payments.

Money market funds, banks and others have been avoidingTreasuries that mature in late October and early November andthe risk aversion has begun to seep into the $5 trillionrepurchase agreement market, which many financial institutionsrely on for short-term loans.

Interest rates on T-bills due Oct. 24 lasttraded at 0.41 percent on Wednesday in highly volatile activity.They fell as low as 0.22 percent on reports of an impendingagreement on raising the debt ceiling. They traded as high as0.72 percent.

While concerns over a potential default have been largelycontained to short-term rate markets, many feared that turmoilmay spread to other assets if an agreement to raise the debtceiling is not reached soon.

"There is a specific risk that if the T-bills don't turninto money, the holders of T-bills need to get fundingelsewhere, but the broader issue is if the government defaultedthen it will make people sell stocks and risky assets moregenerally," said James Sweeney, senior global strategist atCredit Suisse in New York.

The cost to borrow overnight with loans backed by Treasuriesalso jumped to around 0.35 percent earlier on Wednesday. Thesehad traded at around 0.10 percent before fears over the debtceiling came to the fore.

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