TREASURIES-Prices dip as focus remains on Washington

Reuters

* President Obama nominates Janet Yellen to lead the Fed

* Treasury sold $21 billion of 10-year notes

* October Treasuries bill yields elevated, repo costs rise

By Ellen Freilich

NEW YORK, Oct 9 (Reuters) - U.S. Treasuries prices dipped on

Wednesday as the market remained in a state of limbo, waiting

for elected officials to reverse the partial shutdown of the

U.S. government and lift the U.S. debt ceiling.

Markets took President Obama's widely expected nomination of

Federal Reserve Vice Chair Janet Yellen to lead the Fed as a

sign that the U.S. central bank would remain accommodative as it

tries to foster economic activity and lower unemployment.

"Fed policy is unlikely to depart from a lot of the policies

that have been put in place and markets are comfortable with

that notion of continuity," said Karim Basta, director of

economic research and chief investment strategist at III

Associates in Boca Raton, Florida.

"You'll always find a few people who will criticize it, but

the Fed is trying its best to counteract the damaging effects of

fiscal policy, especially over the last two or three years.

That's the way people look at it," he said.

The release of minutes from the Fed's last policy meeting

evoked little reaction from the bond market because the market

was looking ahead.

"The minutes are backward looking. The market assumed Yellen

would be in and today you know she is in and that's forward

looking," said Quincy Krosby, market strategist at Prudential

Financial in New York.

Treasuries have largely traded sideways for the past two

weeks as investors hesitate to enter new trades amid a political

contest in Washington.

The bond market's relatively placid reaction to the

proceedings in Washington up to now is due to investors having

seen a similar drama before and to expectations that a

resolution will be reached at the 11th hour.

"Market reaction so far has been very benign - except for a

couple of spots that were quirky - because we've been through

this before," said Jon Mackay, senior fixed income strategist at

Morgan Stanley Wealth Management in New York.

"Markets are counting on politicians not pushing this over

the cliff and reaching a last-minute deal," he said.

Still, as the October 17 date - when the Treasury says it

will be left with about $30 billion on hand - draws closer,

investors will be more unwilling to put money to work, he said.

The U.S. government entered its ninth day of partial

shutdown on Wednesday and fears have been rising that political

conflict could prevent an increase in the debt ceiling.

Some expect a resolution to raise the debt ceiling will

reduce the safety bid for Treasuries, sending yields higher,

while others see the logjam as adding to demand for bonds.

Benchmark 10-year Treasury notes were last down

7/32 in price to yield 2.66 percent, up from 2.64 percent late

on Tuesday.

The Treasury sold $21 billion in 10-year notes on Wednesday,

the second sale of $64 billion in new coupon-bearing supply this

week. It will also sell $13 billion in 30-year bonds on

Thursday.

Many U.S. economic releases issued by the government,

including Wednesday's wholesale trade data and the crucial

monthly payrolls data that had been scheduled for last Friday,

have been delayed by the shutdown, muddying the picture of the

state of the economy.

The partial government shutdown is seen hurting economic

growth, which has added to the conviction that the Fed will not

start to trim its bond purchases until next year.

Short-dated Treasury bill yields also remained elevated on

Wednesday, and the cost of financing trades through repurchase

agreements rose, as investors avoided U.S. debt that comes due

in late October. Notes due at the end of October are most at

risk of delayed payments if the government fails to increase its

$16.7 trillion debt ceiling.

U.S. Treasury Secretary Jack Lew has warned Congress the

United States would exhaust its borrowing capacity no later than

Oct. 17, at which point it would have only about $30 billion in

cash on hand.

Treasuries bills that mature on Oct. 24 are yielding 27

basis points, much higher than longer-dated debt that matures

outside of what investors see as the danger zone. Three-month

and six-month bills are yielding 0.046

percent and 0.086 percent, respectively.

The cost of borrowing funds overnight against Treasuries in

repo also jumped to around 15 basis points on Wednesday, up from

around 7 basis points on Tuesday.

Rates

View Comments (0)