TREASURIES-Debt ceiling fears move out to late Nov/Dec bills

Reuters

* T-bills due in late Nov/early Dec reflect debt ceiling

fears

* Early gains fade heading into three-day weekend

* Fed buys $1.56 bln bonds due 2038-2043

By Ellen Freilich

NEW YORK, Oct 11 (Reuters) - Yields on Treasuries bills

maturing in late November and December jumped on Friday, as

investors worried that any deal to increase the U.S. debt

ceiling would kick the risks of a default down the road.

Gains in longer-dated maturities faded as the market quieted

before the three-day Columbus Day weekend.

Some of that fade-out was due to efforts by President Barack

Obama and congressional Republican leaders to allow a short-term

reopening of the federal government and an increase in the U.S.

debt limit.

"The Treasury market is in this tight trading range," said

Daniel Heckman, senior fixed income strategist at U.S. Bank

Wealth Management in Kansas City, Missouri.

The risk that U.S. elected officials might not come to an

agreement on the government shutdown and raising the federal

debt ceiling this weekend makes people hesitate to sell

Treasuries, he said.

Supportive for the Treasury market is that this week's three

Treasury auctions are completed, Heckman added.

The Treasury's sales of three-, 10- and 30-year debt this

week drew solid demand.

"The reality is large foreign and institutional investors

realize the U.S. government would make good on its obligations

even with the risk of this default and that - fundamentally -

things aren't that bad," Heckman said.

"We're going to find that longer-term, irreversible damage

wasn't done to the economy," he said. "People will look over

this valley; we won't always have to be addressing this issue."

Yields on short-term Treasuries bills have surged this week

as banks, money funds and others avoid debt that matures or has

coupon payments coming due in the danger zone, when the United

States is expected to run out of funds if the debt ceiling is

not lifted.

On Friday, those concerns were increasingly pushed out to

Treasuries bills that mature in late November and in December,

when the debt ceiling will again be an issue if the government

agrees to postpone the debt ceiling issue by six weeks.

Yields on Treasuries bills maturing on November 29

jumped to 0.18 percent on Friday, up from 0.12

percent late on Thursday and 0.05 percent on Wednesday.

Yields on one-month Treasuries bills that come due on

November 7 traded at 0.26 percent, unchanged from

0.26 percent late on Thursday. They remain significantly higher

than at the start of the month, before concerns about a default

rose, when they yielded only around 0.02 percent.

The debt came under pressure even though most investors

still expect a default by the U.S. government is unlikely.

"The stress in some of the bills is a case of a little bit

of window-dressing by money market funds and others," said Jim

Kochan, chief fixed income strategist at Wells Fargo Funds

Management in Menomonee Falls, Wisconsin. "The officials at

those funds may not be expecting a default, but they need to

take precautions because if there is one, there would be no

defense for not having prepared for it."

The cost to obtain overnight loans backed by Treasuries in

the repurchase agreement market also rose to around 0.20 percent

on Friday, as investors became wary of accepting affected

collateral to back loans.

The repo rate had traded at around 10 basis points until

this week, when it jumped in highly volatile trading on concerns

over the debt ceiling.

At the longer end of the yield curve, benchmark 10-year

notes were last unchanged in price, yielding 2.68

percent. Thirty-year bonds were down 1/32 in price

to yield 3.74 percent.

"Right now the market may be feeling a little sanguine about

prospects for the debt ceiling and government shutdown issues

to be sorted out," said Jeffrey Cleveland, economist at Payden &

Rygel in Los Angeles.

The Federal Reserve bought $1.56 billion in bonds due 2038

to 2043 on Friday as part of its ongoing purchase program.

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