Treasury November Bill Rates Jump on Debt-Ceiling Deferral Bets

Rates on Treasury bills maturing in November and December jumped for a second day as officials in Washington worked on a short-term budget agreement that may push the possibility of a default back six weeks.

Rates on securities due in October fell from their highest levels this week as U.S. lawmakers discussed a House Republican proposal to postpone the deadline for Congress to lift the debt ceiling to Nov. 22 from Oct. 17. Benchmark 10-year notes held a second weekly decline. The U.S. sale of $13 billion of 30-year bonds yesterday drew the highest demand since February after lackluster three- and 10-year notes sales earlier in the week.

“All we’ve done is roll the risk out some -- we’ve kicked the can down the road a bit,” said Brian Edmonds, the head of interest-rates trading in New York at Cantor Fitzgerald, one of 21 primary dealers that trade with the Federal Reserve. “I don’t think it’s pricing in a significant default. That would be a 10 percent bill. It’s more of an inconvenience trade and cheapening.”

Rates on debt due on Nov. 29 rose four basis points, or 0.04 percentage point, to 0.16 percent as of 5 p.m. New York time, according to Bloomberg Bond Trader prices, after adding eight basis points yesterday. They were negative Sept. 30.

The rate on $120 billion in bills due Oct. 17 dropped 11 basis points to 0.20 percent after touching 0.51 percent yesterday. The rate on $93 billion in bills due Oct. 24 fell five basis points to 0.26 percent after climbing as high as 0.50 percent yesterday.

Treasury 10-year note yields rose one basis point or 0.01 percentage point to 2.69 percent after falling as much as four basis points earlier. They gained four basis points this week. 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 12/32.

Volume, Volatility

Treasury trading volume at ICAP Plc, the largest inter-dealer broker of U.S. government debt, dropped 40 percent to $243.7 billion, from $409 billion yesterday, the highest level since Sept. 18. The average this year is $315.8 billion.

Volatility in Treasuries as measured by the Bank of America Merrill Lynch MOVE index dropped to 77.11, the lowest level since Sept. 25. It climbed on Sept. 5 to 114.2, the highest level in two months. It touched a record low 49 in May.

Historically Low

Although rates on bills have risen, they pale by historical measures. Treasury one-month bill rates have averaged 1.5 percent in the past 10 years. During that time the rate touched a high of 5.26 percent in November 2006 and dropped to a low of negative 0.09 percent in December 2008.

The overnight Treasury general collateral repo rate opened at 0.2 percent, according to ICAP Plc, the world’s largest inter-dealer broker, down from the open yesterday of 0.27 percent. It opened at 0.09 percent at the start of the week.

Credit-default swaps insuring against losses on U.S. Treasuries for five years were at 35 basis points, versus 40 at the end of last week, according to Bloomberg data. They have fallen 9 percent this week, the biggest decline since the five days through Sept. 13.

Swaps on Treasuries were the ninth most traded of 1,000 entities tracked by the Depository Trust & Clearing Corp. in the week through Oct. 4, up from 147th two weeks before, with 87 trades covering a gross $2.3 billion of debt.

There are now 953 contracts covering a net $3.6 billion of Treasuries outstanding, the most in a year and up from a more than two-year low of $3.1 billion on Sept. 20.

Treasury Auctions

Yesterday’s Treasury bond sale drew a 2.64 bid-to-cover ratio, compared with an average of 2.47 at the past 10 bond offerings. The auctions of $30 billion in three-year debt on Oct. 8 and $21 billion in 10-year securities the next day drew lower-than-average demand. They were the first sales of coupon securities since the government shutdown began.

The Fed today purchased $1.56 billion in Treasuries maturing between May 2038 and February 2043 as part of its commitment to lower borrowing costs.

House Republicans offered a plan to raise the U.S. debt limit and end a partial government shutdown that would require President Barack Obama to accept policy conditions attached to a spending measure, said two congressional aides. Obama has insisted that he won’t accept conditions for ending the shutdown, which is in its 11th day.

Staff members for Obama and House Speaker John Boehner worked into the night yesterday after Boehner proposed the short-term debt limit increase.

‘Major Accidents’

“The debt-ceiling debate will be resolved without major accidents,” Nicola Mai, senior vice president and sovereign credit analyst at Pacific Investment Management Co., said in an interview on Bloomberg Television’s “The Pulse” with Francine Lacqua. “Politicians realize there is significant consequences to this and that’s why last night we saw some opening on the part of Republicans and Democrats in debt negotiations.”

The extra yield investors get for buying one-month securities instead of 91-day securities reached 28.9 basis points on Oct. 8, the biggest difference since March 2008, according to closing-market data. The spread was 19.8 basis points today.

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.

‘Political Game’

“This is a political game right now,” said Michael Franzese, senior vice president of fixed-income trading at ED&F Man Capital Markets in New York. “It’s a good proposal and the sense is that it gets them to the table to talk. People think they are not going to default, and if they are not going to default, then they put their money into bills.”

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, 2012.

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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