U.S. 10-Year Yield Falls to 7-Week Low; Bill Rates Rise

Treasury notes rose, pushing 10-year yields to a seven-week low, as a budget deadlock that partially shut down the government persisted into a third day and a gauge of U.S. service businesses dropped more than forecast.

The benchmark yields erased an earlier advance made as investors weighed prospects for the government shutdown to merge with the debate over raising the federal debt limit, which the Treasury has said will be reached Oct. 17. The negative effects of a default should the U.S. not raise the debt limit could last decades, the department said in a report.

“The market’s starting to feel the pressures of the softer economic data and the shutdown,” said Sean Simko, who oversees $8 billion at SEI Investments Co. in Oaks, Pennsylvania. “That’s why you’re starting to see a bid in the marketplace.”

The benchmark 10-year yield fell one basis point, or 0.01 percentage point, to 2.61 percent at 5 p.m. in New York, according to Bloomberg Bond Trader prices. It touched 2.58 percent, the lowest level since Aug. 12, after rising earlier to 2.65 percent. The price of the 2.5 percent debt due in August 2023 rose 3/32, or 94 cents per $1,000 face amount, to 99 3/32.

Rates on the $93 billion in Treasury bills that mature Oct. 24 increased to 0.13 percent after touching negative 0.01 percent on Sept. 27. Rates on the $120 billion of bills maturing Oct. 17 advanced to 0.11 percent after falling to negative 0.01 percent on Sept. 24. Those rates reached 0.14 percent on Oct. 1, the highest since December.

Curve Inversion

Investors seeking to hedge against the risk of a default on bills maturing closest to the debt-ceiling deadline pushed the difference in rates between one- and three-month bills to the biggest gap since the 2008 financial crisis.

One-month bill rates climbed to as high as 0.14 percent, while rates on three-month bills touched 0.03 percent, the biggest inversion of the so-called bill curve since September 2008.

“You’re seeing an aversion to the bills on and around the date when the debt ceiling might be breached,” said Dan Mulholland, head of Treasury trading at BNY Mellon Capital Markets in New York. “A lot of these short Treasury bills are typically held by accounts that use them for collateral. They don’t want to be in a situation where they can’t make good on a collateral payment.”

Past Crises

Two years ago, one-month bill rates climbed to a 29-month high of 0.18 percent as the Aug. 2, 2011, deadline set by Treasury to avoid a default approached. They traded at 0.015 percent in December 2012 before a year-end trigger would force automatic spending cuts and tax increases.

Three-month (USGG3M) Treasury bill rates touched negative 0.0101 percent on Sept. 27, the lowest level this year. The 2013 average is 0.048 percent. The three-month rate climbed to 0.09 percent before the August 2011 deadline, and rose as high as 0.081 percent in the week before Dec. 31, 2012.

Treasury price swings as measured by the Merrill Lynch Option Volatility Estimate Index fell for a second day, dropping 2.2 percent to 80.33. The average this year was 72.14.

Trading volume at ICAP Plc, the largest inter-dealer broker of U.S. government debt, rose for the first time in three days, increasing 5.1 percent to $339 billion. It was the highest level since Sept. 19. The 2013 average is $316 billion.

The ISM’s U.S. non-manufacturing index fell to 54.4 in September from 58.6 the prior month, the Tempe, Arizona-based group said today. The median forecast in a Bloomberg survey called for a drop to 57. The figure includes industries that make up almost 90 percent of the economy.

No Report

The Labor Department won’t issue its September employment data tomorrow because of the shutdown. An alternative date for the report, usually released the first Friday of every month, hasn’t been scheduled, the department said in a statement.

A partial government shutdown lasting one week would shave 0.1 percentage point from economic growth, according to economists surveyed by Bloomberg, with the damage accelerating if the closure persists. It will cost at least $300 million a day in lost output at the start, according to IHS Inc. (IHS), a Lexington, Massachusetts-based research company.

The effects of failing to raise the $16.7 trillion debt ceiling would be even bigger. The “catastrophic” consequences of a U.S. default may include high interest rates, lower investment and slow growth and “could last for more than a generation,” the Treasury said in a report.

‘Increasingly Concerned’

“The market is becoming increasingly concerned that we’ll get to a point where the Treasury may not be able to pay its bills,” said Michael Pond, head of global inflation-linked research at Barclays Plc, one of 21 primary dealers that trade directly with the Fed. “Situations where the market is concerned the U.S. Treasury may not pay its bills on time are indeed quite rare.”

House Republicans are divided between those aligned with Senator Ted Cruz of Texas, who are insisting on confrontation over the nation’s 2010 health-care law, Obama’s signature legislative achievement, and at least 15 others who say they would support Senate Democrats’ spending bill. That legislation would end the shutdown without conditions attached.

Credit-default swaps that insure U.S. debt from non-payment for five years climbed to 35.5 basis points yesterday, the highest in almost six months, according to CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market. The contracts were the 15th most traded of 1,000 entities tracked by the Depository Trust & Clearing Corp. in the week through Sept. 27, up from 147th the previous period.

The average rate for borrowing and lending Treasuries for one day in the repurchase market was 0.071 percent yesterday, according to a GCF repo index provided by the Depository Trust & Clearing Corp. The repo rate averaged 0.06 percent since June, compared with 0.14 percent for the first five months of 2013.

The Treasury said it will auction $64 billion of three-, 10-and 30-year securities next week.

To contact the reporters on this story: Daniel Kruger in New York at dkruger1@bloomberg.net; Cordell Eddings in New York at ceddings@bloomberg.net

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

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