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Treasuries Fall Amid Bets Shutdown May Be Short-Lived

Treasuries fell for the first time in three days on speculation a shutdown of the U.S. government may end soon enough for lawmakers to work on extending the federal debt limit, minimizing damage to the economy.

Benchmark 10-year yields rose from almost the lowest level in seven weeks as the government began its first partial shutdown in 17 years after Congress failed to break a partisan deadlock by a midnight deadline. An extended stoppage may prevent the release of jobs data on Oct. 4 that’s closely watched for clues to Federal Reserve policy. The central bank last month refrained from slowing the bond-purchase program it has used to help to keep borrowing costs from rising.

“It’s a wait-and-see attitude on the government shutdown,” said Larry Dyer, a U.S. interest-rate strategist at HSBC Holdings Plc in New York, one of 21 primary dealers that trade with the Fed. “The expectation is it will be short-lived, and therefore the ultimate impact would be modest.”

The U.S. 10-year yield increased four basis points, or 0.04 percentage point, to 2.65 percent at 5 p.m. New York time, according to Bloomberg Bond Trader prices. The price of the 2.5 percent security due in August 2023 fell 11/32, or $3.44 per $1,000 face amount, to 98 22/32. The yield rose as high as 2.66 percent. It dropped yesterday to 2.59 percent, the lowest since Aug. 12.

Congressional leaders have scheduled no further negotiations on spending legislation, raising concern among some lawmakers that the shutdown may have an impact on the more consequential fight over how to raise the U.S. debt limit to avoid a first-ever default after Oct. 17.

Bill Rates

Rates on Treasury bills that mature Oct. 24 increased to 0.075 percent today after touching negative 0.01 on Sept. 27. Two years ago, one-month bills climbed to a 29-month high of 0.18 percent as the Aug. 2, 2011, deadline set by Treasury to avoid a default approached.

Three-month (USGG3M) Treasury bill rates rose to 0.0152 percent. They touched negative 0.0101 percent on Sept. 27, the lowest level this year. The 2013 average is 0.048 percent.

Treasury trading volume at ICAP Plc, the largest inter-dealer broker of U.S. government debt, declined 1.2 percent to $325 billion. The average this year is $317 billion.

Higher Volatility

Volatility in Treasuries as measured by the Merrill Lynch Option Volatility Estimate Index rose for a fifth day, the longest streak of gains since Sept. 5, climbing 2.8 percent to 87.37. The average this year is 72.05.

Investors in Treasuries were long over the past week, betting the prices of the securities will rise, according to a survey by JPMorgan Chase & Co.

The proportion of net longs fell to 6 percentage points in the week ended yesterday, according to JPMorgan, 2 percentage points lower than the week ended Sept. 23. Outright longs rose to 21 percent, from 19 percent, while outright shorts increased to 15 percent, from 11 percent. Investors reduced their neutral bets to 64 percent, from 70 percent.

The government shutdown isn’t in itself a trigger for a downgrade of the U.S.’s AAA rating, even as the political gridlock undermines confidence in fiscal decision-making and in the nation’s debt limit being raised in time to avert a default, according to a statement by Fitch Ratings.

Standard & Poor’s cut the U.S. rating to AA+ from AAA in August 2011, a move that reflected the impasse over raising the debt limit as well as the government’s lack of a plan to rein in its debt load.

While the downgrade didn’t result in investors charging the U.S. more to borrow, it contributed to a global stock-market rout that erased about $6 trillion in value from July 26 to Aug. 12, 2011.

Gross’s Outlook

Pacific Investment Management Co.’s Bill Gross said the U.S. will avoid a “catastrophic” default on Treasury securities if lawmakers fail to extend the debt limit on the nation’s debt. The odds of a default are “a million-to-one,” as the Treasury Department will be able to take other measures to ensure it is servicing the country’s debt, he said.

“The Treasury is not going to default on their debt simply because the debt ceiling isn’t going to be raised,” Gross, manager of the world’s biggest bond fund, said during a Bloomberg Television interview with Trish Regan and Adam Johnson. “There will be other repercussions like slower economic growth. But the Treasury is not going to default.”

Manufacturing Gain

Treasuries extended losses as the Institute for Supply Management’s factory index unexpectedly climbed to the highest level since April 2011. The gauge rose to 56.2 in September, from 55.7 a month earlier, the Tempe, Arizona-based group reported. The median forecast of economists polled by Bloomberg called for a decline to 55. Readings above 50 indicate growth.

“The economic data for the moment is not as important, given the uncertainty of the government shutdown,” said Gary Pollack, who manages $12 billion as head of fixed-income trading at Deutsche Bank AG’s Private Wealth Management unit in New York.

The Labor Department won’t release its monthly employment report on schedule if the government is closed, according to an official in President Barack Obama’s administration who wasn’t authorized to discuss the process and requested anonymity.

The shutdown may help to delay a reduction in the Fed’s purchases of Treasuries and mortgage bonds, according to Citigroup Inc. Policy makers said on Sept. 18 they want more proof of an economic recovery before tapering their $85 billion-a-month program.

‘On Hold’

“The Fed has told us they’re on hold for quite some time and we now are not going to get any economic readings for probably a couple of months that are accurate at least,” Michael Plavnik, head of the short-term interest-rate trading desk at Citigroup in London, said in an interview on Bloomberg Television’s “On the Move” with Manus Cranny. “The Fed’s not really going to have a chance to taper really until the first quarter of next year.”

Payrolls increased by 180,000 in September, the most since April, after climbing 169,000 in August, according to a Bloomberg survey. The jobless rate held at 7.3 percent, a separate survey showed.

To contact the reporter on this story: Daniel Kruger in New York at dkruger1@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

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