Treasury Market Volatility Climbs on Shutdown, Debt-Limit Talks

Treasury market volatility increased the most in six weeks as a U.S. budget impasse forced a partial shutdown of federal services and the government approached its debt limit.

Price swings as measured by the Merrill Lynch Option Volatility Estimate Index rose by 9 percent yesterday, the most since Aug. 16. The gauge advanced for a fifth day, the longest run of increases in about a month. The index level was at 87.37, versus the average of 69.07 for the past year. Treasury Secretary Jacob J. Lew said the U.S. has begun using the last measures available to avoid breaching the nation’s debt limit.

“Things will remain volatile” as turbulence spreads from the government to the market, said Roger Bridges, who helps oversee the equivalent of about $21.6 billion as the head of fixed income in Sydney at Tyndall Investment Management Ltd., part of Nikko Asset Management Co. “If it’s in the halls of Congress, it’s going to be in the Treasury market.”

Ten-year U.S. yields were little changed at 2.64 percent as of 6:55 a.m. in London, Bloomberg Bond Trader data show. The price of the 2.5 percent note due in August 2023 was 98 25/32.

Japan’s 10-year yield slid two basis points to 0.64 percent, the lowest level since May 10. A basis point is 0.01 percentage point.

Treasury Performance

Treasuries have fallen 2.5 percent this year, according to the Bloomberg World Bond Indexes, reflecting concern the Federal Reserve is planning to trim its $85 billion in monthly bond purchases as the U.S. economy improves.

Japan’s debt returned 2.1 percent, the indexes show, after the central bank in April began its own debt-buying program to support the economy, snapping up more than 7 trillion yen ($71.6 billion) of bonds a month.

Lew, in a letter to House Speaker John Boehner yesterday, repeated that the debt measures will be exhausted no later than Oct. 17 and urged Congress to extend the nation’s borrowing authority immediately.

Once they run out, “we will be left to meet our country’s commitments at that time with only approximately $30 billion,” Lew said in the letter. “This amount would be far short of net expenditures on certain days, which can be as high as $60 billion.”

The first U.S. government shutdown in 17 years has done little to dent confidence in markets on speculation the stoppage will end in time for lawmakers to tackle the nation’s debt limit.

Stress Increases

The Bloomberg U.S. Financial Conditions Index rose yesterday for the first time in seven days, increasing 13 percent to 1.325. The gauge measures stress in the markets by combining everything from money-market rates to yields on government and corporate bonds to volatility in equities.

Treasuries fell yesterday, with the 10-year yield advancing four basis points, reflecting waning demand for haven assets.

Rates on U.S. bills due Oct. 24 were as high as 0.1 percent yesterday, after touching negative 0.01 on Sept. 27.

Two years ago, one-month yields 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 rates rose to 0.02 percent yesterday. They touched negative 0.0101 percent on Sept. 27, the lowest level this year. The 2013 average is 0.048 percent.

Trading volume at ICAP Plc, the largest inter-dealer broker of U.S. government debt, declined 1 percent to $326 billion yesterday. The average for the past year is $294 billion.

ISM Report

Treasuries also fell yesterday as the Institute for Supply Management’s factory index of U.S. manufacturing unexpectedly climbed to the highest level since April 2011.

U.S. payrolls probably increased by 180,000 in September, the most since April, after advancing by 169,000 in August, according to a Bloomberg survey of economists. The jobless rate held at 7.3 percent, a separate survey showed.

The Labor Department won’t release the employment report as scheduled Oct. 4 if the government is closed, according to a government official who wasn’t authorized to discuss the process and requested anonymity.

The Federal Open Market Committee on Sept. 18 left its monthly asset purchases unchanged at $85 billion and signaled that benchmark rates will remain low into 2016. The U.S. will buy as much as $4 billion of notes today.

The U.S. shutdown is fueling speculation that the Fed will delay reducing its debt purchases if it hurts the economy.

“Yields will go down a bit,” said Allen Lei, a trader of Treasuries in Taipei at Hontai Life Insurance Co., which oversees the equivalent of $6.2 billion. “The shutdown will have some negative impact on the economy.” Lei said he bought 30-year Treasuries yesterday at 3.72 percent. The yield was 3.71 percent today.

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