TREASURIES-U.S. Oct bill rates jump as debt clock runs down

Reuters

* Default fears lift October T-bill rates near 5-year highs

* U.S. lawmakers edge closer on deal to raise debt ceiling

* Longer-dated bond prices fall on hopes of fiscal stability

* Fitch puts United States on rating watch negative

By Richard Leong

NEW YORK, Oct 15 (Reuters) - Interest rates on U.S. Treasurybills that mature in the next two weeks jumped on Wednesday onfears the government will delay payments on them, even aslawmakers hinted there could be a deal to raise the debt ceilingbefore a Thursday deadline.

Until the $16.7 trillion statutory borrowing limit isactually increased, few investors are going to buy Treasurybills that come due in the latter half of October because of thepossibility of a "technical default," analysts and traders said.

"It has not calmed down in the front-end bill market yet. Noone feels confident about a deal yet," said Mary Beth Fisher,head of U.S. interest rates strategy at SG Corporate &Investment Banking in New York.

Risk of a default led Fitch Ratings to put the UnitedStates' AAA rating on "rating watch negative" late on Tuesday.Standard & Poor's stripped the United States of its top creditrating in August 2011 in the aftermath of the previous debtceiling fight.

Interest rates on T-bills due on Oct. 24 and Oct. 31 swungwildly . They surged above 0.50 percentin late trading, up 30 basis points from late on Friday. Therates fell 10 basis points earlier on Tuesday on hopes that adebt ceiling agreement would be reached to avert a default.

The yield on a two-year Treasury note that matures at theend of October and was issued in 2011 jumped insympathy with its October T-bill counterparts. Its yield lasttraded at 0.7297 percent, up 21 basis points from Friday.

The U.S. bond market was closed on Monday for the ColumbusDay holiday.

Senate leaders were close to a deal that would reopen thegovernment, which has been partially shut for two weeks, andraise the debt limit until early 2014, while an alternative planproposed by House Republican leaders failed to gain enoughsupport in a closed-door meeting for the House toproceed.

These proposed fixes on the debt ceiling and a possible endto the first government shutdown in 17 years rekindled someappetite for T-bills that mature in the second half of Novemberto the end of the year, but T-bill rates in early 2014 rose onworries about another showdown between the White House andRepublican lawmakers over the budget and the debt ceiling.

"They haven't taken out the default risk. They are justbeing repriced further out," SG's Fisher said.

Delayed payments on Treasuries, traders fear, could unleashchaos on financial markets where Treasuries are used ascollateral for many types of loans and benchmarks for otherinterest rates. Even if the delay on Treasuries interest andprincipal payments is brief, the aftermath could be a headachefor traders and investors.

"Operationally, it's going to be a mess to clear it up,"said Bret Barker, portfolio manager at TCW in Los Angeles.

LOUSY T-BILL AUCTIONS

On Tuesday, the U.S. Treasury Department sold $35 billionworth of three-month bills and $30 billion worth of six-monthbills at the weakest bids seen since 2009.

The Treasury will sell $68 billion in T-bills on Wednesday: $20 billion in one-month bills ; $26 billion in189-day cash management bills and $22 billion in one-year bills.

Longer-dated Treasuries prices fell, signaling fewersafehaven bids on hopes of some longer-term fiscal stability,said Wilmer Stith, co-manager of the Wilmington Broad MarketBond Fund in Baltimore.

"In the two- to 30-year part of the curve, yields rise whenit seems there's a greater probability of extending the debtceiling and reopening the government," he said.

Benchmark 10-year Treasury notes fell 9/32 inprice for a yield of 2.726 percent, up 3.5 basis points fromlate on Friday.

The 30-year bond shed 22/32 to yield 3.785percent, up about 4 basis points from Friday.

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