* Washington may be closing in on deal to resolve debt
* Wall Street up more than 1 pct, global stock index climbs
* U.S. dollar up against yen
By Caroline Valetkevitch
NEW YORK, Oct 16 (Reuters) - World equity markets rose and
short-term U.S. Treasury debt rallied on Wednesday as lawmakers
neared a last-minute deal to prevent the United States from
defaulting on its debt.
U.S. Senate Majority leader Harry Reid said a bipartisan
compromise was reached in the Senate to lift the government's
$16.7 trillion borrowing limit and re-open the government, which
has been shuttered since October 1.
News that a deal had emerged was enough to push U.S. stocks
within striking distance of an all-time high. It comes after
days of political wrangling over the U.S. budget and the debt
limit, which has sparked substantial preparation by dealers in
government securities in case of a default.
"Any deal that gets us out of the current box, where we have
a potential imminent default, is good," said Cam Albright,
director of asset allocation at Wilmington Trust Investment
Advisors in Wilmington, Delaware.
Even though final passage may come after the Treasury's
Thursday deadline for being able to borrow, it will end up
making this back-and-forth similar to the fiscal ceiling debate
in 2012, or the extensive preparations to prepare technology
systems for the so-called Y2K millennium bug in 2000.
The fixed income market has busied itself with preparations
in case of a missed coupon payment, which would reverberate
through the short-term repurchase market, a key source of
overnight funding for banks and other institutions that depend
on the use of Treasury securities as collateral.
That market was effectively shut when Lehman Brothers
collapsed in 2008 and endured severe strains in 2011 during the
previous debt ceiling crisis.
"People were staying up all night worried about what would
happen during (the Y2K) deadline. Then nothing happened," said
David Keeble, global head of interest rate strategy with Credit
Agricole Corporate & Investment Bank in New York.
"In this case, all the switching out of T-bills and dealings
with repos would be for naught if we don't default."
The sharp decline on Wednesday in near-term Treasury bill
yields underscored the fluidity of the back-and-forth in
Washington. Yields on Treasury bills maturing on Oct. 24 spiked
as high as 0.71 percent in the morning before reversing
dramatically to yield 0.30 percent - still elevated, but nowhere
near as stressed.
However, the difference between bid and offer prices in the
short-term rates market and the repo market were elevated,
widening to about 10 basis points. They normally trade around a
1-basis-point gap. Activity in the repo market was quiet,
according to brokers, because traders were waiting for the
outcome of the negotiations in Washington.
The CBOE Volatility index, Wall Street's fear index,
fell 15 percent to 15.87.
The Dow Jones industrial average was up 183.28
points, or 1.21 percent, at 15,351.29. The Standard & Poor's 500
Index was up 20.90 points, or 1.23 percent, at 1,718.96.
The Nasdaq Composite Index was up 43.08 points, or 1.14
percent, at 3,837.09.
MSCI's world equity index, which tracks
shares in 45 countries, was up 0.65 percent, not far from a
five-year peak of 391.54 hit on Sept 19.
Worries over whether a resolution will be reached have
roiled markets, and late on Tuesday Fitch Ratings warned it
could cut the U.S. sovereign rating from AAA, citing the
If Washington did not reach a deal by Thursday, the U.S.
government will by law no longer be able to add to the national
debt and will have to rely on incoming revenue and about $30
billion in cash to pay the country's many obligations.
That money is expected to run out quickly and the government
would start missing payments in the weeks ahead.
The uncertainty remained apparent in the U.S. debt market,
where the cost of insuring one-year U.S. debt against default
using credit default swaps recently hit its highest in over two
The owners of more than 20 U.S. Treasury securities are seen
most at risk as the U.S. Congress struggles to resolve the
impasse, with the Federal Reserve almost certainly the largest
Even if a deal is reached, it must still clear the full
Senate and possible procedural snags on Wednesday before moving
to the fractious House of Representatives, which was unable to
produce its own deal on Tuesday.
With a large interest payment due at the end of the month
and $58 billion in other obligations coming due the following
day, many analysts have circled Oct. 31 as a possible date for
default if Congress has still failed to reach an agreement.
The dollar rose against major currencies. The euro
was down 0.2 percent against the dollar at $1.3493.
In the Treasury market, benchmark 10-year U.S. Treasuries
were up 3/32, their yield at 2.7092 percent.
Gold prices dropped on expectations of a deal in Washington.
Spot gold fell 0.6 percent to $1,272.40 an ounce.
U.S. crude oil futures gained more than 1 percent as
Congress closed in on a deal. Brent crude futures gained
0.8 percent to $110.88 a barrel, while U.S. crude oil futures
gained 1.2 percent to $102.43 a barrel