Treasury Bill Rates Tumble on Debt-Deadline Talks Optimism

Rates on Treasury bills tumbled and yields on longer-maturity U.S. debt rose on speculation lawmakers were working toward an agreement on a short-term increase in the nation’s debt limit to avoid a U.S. default.

The rates for all bills maturing through Nov. 14 fell, while those with due dates after that to Jan. 2 rose, as House Republican leaders proposed a short-term increase in the debt ceiling and the White House endorsed it. Hong Kong’s futures and options market operator upped the discount on Treasury bills used as collateral for margin requirements. The U.S. sold $13 billion of 30-year bonds with the highest demand since February.

“We are starting to see investor concerns shift attention to November and December bills as they expect the ceiling may be extended by several weeks,” said Andrew Hollenhorst, fixed-income strategist at Citigroup Inc. in New York. “Since it’s not a done deal, we are still seeing weakness in October bills, but yields have come in a bit since the press began reporting a six-week extension might be offered by Republicans.”

The rate on $120 billion in bills due Oct. 17 dropped for the first time in six days, falling 17 basis points, or 0.17 percentage point, to 0.31 percent at 5 p.m. New York time, according to Bloomberg Bond Trader prices. It touched 0.51 percent earlier, the highest level since they were sold in October 2012. The rate on bills due Nov. 21 rose eight basis points to 0.12.

Repo Levels

The 10-year yield gained two basis points to 2.68 percent after touching 2.72 percent, the highest level since Sept. 23. The 2.5 percent note due in August 2023 fell 5/32, or $1.56 per $1,000 face amount, to 98 14/32. Yields on 30-year bonds were little changed at 3.73 percent after gaining as many as five basis points before the auction.

The overnight Treasury general collateral repo rate closed at 0.26 percent after opening at 0.27 percent, according to ICAP Plc, the world’s largest inter-dealer broker. That’s up from 0.09 percent at the start of the week.

“The concern by front-end investors has certainly caused an aversion to Treasury bills which is now manifesting itself into the repo market,” said Kenneth Silliman, head of U.S. short-term rates trading at Toronto-Dominion Bank’s TD Securities unit in New York. “Market participants are building in a much higher risk premium for receiving collateral that could be potentially associated with a default.”

The 21 primary dealers serving as counterparties to the Fed in its open market operations cut their holdings of short-term Treasury bills to $16.2 billion for the week ended Oct. 2, the lowest since October 2012, central bank data show.

Treasuries ‘Haircut’

The “haircut” for Hong Kong investors will rise to 3 percent from 1 percent today for Treasuries with maturities of less than one year in margin requirements for index futures and options, Hong Kong Exchanges & Clearing Ltd. said in a circular. Treasuries with longer maturities aren’t affected.

“You are seeing some responses to the nonsense going on here,” said David Ader, head of U.S. government-bond strategy at CRT Capital Group LLC in Stamford, Connecticut. “The market is making comments about the risk of default and Hong Kong is following suit. We’ve seen this type of action in the bill market already.”

The budget proposal today by House Speaker John Boehner, which wouldn’t end the 10-day-old partial shutdown of the federal government, would push the lapse of U.S. borrowing authority to Nov. 22 from Oct. 17.

Market ‘Panic’

Jay Carney, the White House press secretary, said President Barack Obama would support a short increase in the U.S. debt limit with no “partisan strings attached,” though he prefers a longer extension. House Republicans haven’t specified what they plan to tie to the measure and Carney said the White House would need to see a bill before accepting it.

Treasury Secretary Jacob J. Lew told the Senate Finance Committee in prepared testimony that failing to raise the debt ceiling by Oct. 17 “will impact everyday Americans beyond its impact on financial markets.”

“The deadline was starting to panic the markets,” said Thomas di Galoma, head of U.S. rates sales at ED&F Man Capital Markets in New York. “We’re starting to see the bill market reprice itself to lower yields.”

A short-term agreement in the U.S. could push U.S. bills lower as investors anticipate a further dispute on the debt ceiling, according to Ewen Cameron Watt, chief investment strategist at BlackRock Inc.’s Investment Institute.

‘Another Round’

“If it goes OK, kicking the can down the road, then in a few weeks’ time there will be another round of this stuff,” he said in an interview on Bloomberg Television’s “The Pulse” with Guy Johnson. “In the meantime, maybe short bills get too cheap.”

As of Oct. 7, the U.S. Treasury had a payment capacity of $127 billion and it will still have $70 billion on Oct. 17, according to estimates compiled by Bank of America Merrill Lynch.

Treasuries (BUSY15) due in one-to-five years have declined 0.2 percent this year, according to Bloomberg World Bond Indexes. Those maturing in more than 10 years have dropped 10 percent, the data show.

The 30-year bonds sold today yielded 3.758 percent, compared to 3.82 percent at the previous offering on Sept. 12, the highest yielding sale since July 2011, and a forecast of 3.784 percent in a Bloomberg News survey of eight of the Federal Reserve’s 21 primary dealers.

The bid-to-cover ratio, which gauges demand by comparing total bids with the amount sold, was 2.64, the highest since February, compared with an average of 2.47 at the past 10 auctions.

‘Solid Overall’

“Good statistics overall -- a solid overall result,” said Christopher Sullivan, who oversees $2.2 billion as chief investment officer at United Nations Federal Credit Union in New York. “The auction was encouraged by late news that we are close to reaching a temporary deal with respect to the debt ceiling.”

Indirect bidders, an investor class that includes foreign central banks, purchased 41.9 percent of the bonds, compared with an average of 37.8 percent for the past 10 sales.

Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased 22.6 percent of the bonds, compared with an average of 15.4 percent at the last 10 auctions.

Thirty-year bonds have lost 12.5 percent this year, compared with a 2.6 percent drop in the broader U.S. Treasuries market, according to Bank of America Merrill Lynch indexes. Long bonds returned 2.5 percent in 2012, versus a 2.2 percent gain by Treasuries overall.

Third Offering

Today’s offering is the third of three note and bond auctions this week totaling $64 billion. The government sold $30 billion in three-year debt on Oct. 8 and $21 billion in 10-year securities yesterday.

The sales will raise $31.7 billion of new cash, as maturing securities held by the public total $32.3 billion, according to the U.S. Treasury.

The Fed today purchased $1.38 billion in Treasury inflation protected securities maturing between April 2028 and February 2043.

The extra yield investors get for buying one-month securities instead of 91-day securities was 17.2 basis points after reaching 28.9 basis points on Oct. 8, the biggest difference since March 2008, according to closing-market data. The longer-dated bills usually yield more than their one-month counterparts. In 2013, investors have been able to earn almost one basis point on average by buying the longer-dated security.

Two years ago, one-month bill rates climbed to 0.17 percent in the days before the Aug. 2, 2011, deadline set by the Treasury to avoid a default. They were at 0.015 percent in December 2012 before a year-end trigger of automatic spending cuts and tax increases.

The three-month rate climbed to 0.09 percent before the August 2011 deadline, and it rose as high as 0.081 percent in the week before Dec. 31.

To contact the reporter on this story: Susanne Walker in New York at swalker33@bloomberg.net

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

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