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GLOBAL MARKETS-Stocks jump, bill prices up as U.S. debt deal close

* 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