TREASURIES-U.S. near-term debt insurance costs, bill rates jump

Reuters

* Short-term bill, credit market edgy as debt deadline nears

* One-year debt insurance costs highest in over two years

* October bill rates rise further above 2-year T-note yields

* U.S. 10-year yields stable on signs deal may be near

By Emelia Sithole-Matarise

LONDON, Oct 16 (Reuters) - The cost of insuring against anear-term U.S. default and rates on October Treasury billsjumped on Wednesday on concern lawmakers may not reach a dealto lift the federal debt ceiling before the government runs outof cash.

The increased tension in short-term debt and credit marketscame after expectations that a deal could be announced late onTuesday were not met. However, the broader Treasury market waslargely steady after Senate leaders were said to be close toagreeing a deal that would also reopen the partially shutgovernment.

"A deal looks closer but it's not done," said NickStamenkovic, a strategist at RIA Capital Markets in Edinburgh.

"Whilst Treasuries are pretty stable there's nervousness atthe short end. Investors are worried that if there was the worstcase scenario and a technical default were to occur, theirpayments may be delayed. Hence we have seen a sharp rise inyields and worsening liquidity at the short end."

The government's borrowing authority is set to run out on Thursday and if no deal is reached by then, a default couldquickly follow, freezing the U.S. financial sector andpotentially harming the global economy.

Reflecting the near-term threat, the cost of insuringone-year debt against default jumped to its highest since July2011 at 75 basis points while five-year rates were unchanged at37 bps, according to data provider Markit.

The one-year rate has surged more than tenfold from 6 bps inearly September, taking it 38 bps above the five-year rate.

The cost of buying longer-term credit protection is normallyhigher than for short-term cover.

Rates on bills maturing in October were above 0.50 percent, some 15-20 bps more than two-yearyields. Yields on bills maturing in November were also up.

U.S. 10-year T-note yields were steady at 2.72 percent while T-note futures were flat at125-55/64.

Despite the short-term default risk, investors have boughtU.S Treasuries, the world's most liquid debt securities, as arelatively safe asset and because any disruption to paymentswould be temporary.

"If you're afraid of a U.S. default what do you do? There'sno obvious answer because Treasuries tend to rally," said CiaranO'Hagan, rate strategist at Societe Generale in Paris.

Citigroup said on Tuesday the bank no longer holds anyU.S. Treasury bills that mature before Oct. 31.

"The market is pricing in that the U.S. will get thesituation sorted. (But) nervousness in the short end continues.The Oct. 24 bills have been the whipping boy of the market," oneLondon-based trader said.

"I'm not seeing a lot of flow at the moment. I saw guyswanting to sell them but then the bids kept backing up. You cantechnically short them but no one is going to take them ascollateral so I'm not seeing any of that stuff."

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