Treasury Yield at Almost 7-Week Low as Impasse Persists

Treasury 10-year yields traded at almost a seven-week low after President Barack Obama and congressional leaders failed to make progress on resolving a budget impasse and a gauge of U.S. service businesses fell.

The benchmark yields declined as investors weighed prospects for the continuation of a partial government shutdown to merge with the debate over raising the federal debt ceiling. House Speaker John Boehner said yesterday Obama refused to negotiate in a meeting with top congressional leaders about the government shutdown.

“The debt ceiling and government funding are probably going to be wrapped together in the same negotiation in the next couple of weeks, and the hard deadline of preventing a default is going to force lawmakers into some kind of an agreement,” said Thomas Simons, a government-debt economist in New York at Jefferies LLC, one of the 21 primary dealers that trade with the Federal Reserve. “It isn’t time to worry yet.”

The benchmark 10-year yield fell two basis points, or 0.02 percentage point, to 2.6 percent at 10:49 a.m. in New York, according to Bloomberg Bond Trader prices. The 2.5 percent note due in August 2023 rose 1/8, or $1.25 per $1,000 face amount, to 99 3/32. The yield increased earlier to as high as 2.65 percent. It dropped to 2.59 percent on Sept. 30, the lowest level since Aug. 12.

Treasuries lost 2.4 percent this year through yesterday after returning 2 percent in 2012, according to Bloomberg World Bond Indexes. (BUSY) The Bloomberg Global Developed Sovereign Bond Index (BGSV) has lost 2.8 percent in 2013.

ISM Gauge

The Institute for Supply Management’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.

A partial shutdown of the U.S. government lasting one week would shave 0.1 percentage point from economic growth, according to the median estimate of economists surveyed by Bloomberg, with the damage accelerating if the closure persists. The shutdown 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 government will run out of borrowing authority Oct. 17, according to the Treasury Department, leaving only cash to pay the bills.

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

Default Swaps

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.

Rates on Treasury bills that mature Oct. 24 increased to 0.115 percent after touching negative 0.01 percent 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. They traded at a yield of 0.015 percent in December 2012 before a year-end trigger would force automatic spending cuts and tax increases.

Three-Month

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

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

The extra yield on 30-year bonds above that of 10-year securities widened to as much as 109 basis points today. A steeper yield curve signals diminishing demand from investors for riskier longer-maturity bonds.

“Concern that the U.S. debt ceiling won’t be raised is being reflected in the CDS spreads and the steepening of the yield curve,” said Yoshio Takahashi, chief non-yen bond strategist at Barclays Plc in Tokyo. “Our main scenario is for the fiscal debate to be resolved and for yields to move higher.”

Jobless Claims

U.S. jobless claims rose by 1,000 to 308,000 in the week ended Sept. 28, from a revised 307,000, a Labor Department report showed today in Washington. The median forecast of 50 economists surveyed by Bloomberg called for a rise to 315,000. Continuing claims jumped as California worked through its backlog of applications following a change in computer systems.

The Labor Department won’t release its monthly payrolls report tomorrow if the government remains closed, according to the Bureau of Labor Statistics.

Fed policy makers said on Sept. 18 they want more evidence of an economic recovery before slowing their $85 billion of monthly asset purchases.

The central bank has held its key rate target at zero to 0.25 percent since December 2008 and has vowed to keep it there until the economy and employment show a sustained recovery.

Treasury trading volume at ICAP Plc, the largest inter-dealer broker of U.S. government debt, fell for a second day yesterday, declining 1.1 percent to $322 billion.

The Treasury is scheduled to announce today the size of three auctions scheduled for next week. The U.S. will sell $30 billion of three-year notes on Oct. 8, $21 billion of 10-year debt the following day, and $13 billion of 30-year bonds on Oct. 10, according to Stone & McCarthy Research Associates, an economic advisory company in Princeton, New Jersey.

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