Treasuries End Advance as U.S. Prepares Debt Sales

Treasuries snapped a two-day advance as the U.S. prepared to auction $64 billion of notes and bonds next week and the partial shutdown of the government persisted for a fourth day.

Benchmark 10-year note yields rose from almost a seven-week low, trading in the tightest weekly range in almost six months. One-month bill rates matched the highest level since 2009. House Speaker John Boehner tried to unite Republicans on a plan to reopen the government, raise the debt cap and achieve as many political priorities as possible. The Treasury has said it will exhaust measures to avoid exceeding the borrowing limit Oct. 17.

“The base case is no default, they’ll come to their senses,” said Kevin Flanagan, a Purchase, New York-based fixed-income strategist for Morgan Stanley Smith Barney. “There are a lot of dominos that are affected by the government shutdown, but in the near term it’s the debt ceiling that’s the focus.”

Ten-year U.S. yields climbed four basis points, or 0.04 percentage point, to 2.65 percent at 5 p.m. New York time, Bloomberg Bond Trader data show. The price of the 2.5 percent debt due August 2023 fell 11/32, or $3.44 per $1,000 face amount, to 98 3/4. The yield increased two basis points this week, trading between 2.66 percent and 2.58 percent, the narrowest range since April. The bottom of the range, reached yesterday, was the lowest level since Aug. 12.

Rates on Treasury bills that mature Oct. 24 traded at 0.12 percent today, from negative 0.01 percent on Sept. 27, as investors demanded extra compensation for the risk of holding the securities.

Curve Inversion

Money managers are getting out of Treasuries maturing closest to the debt-ceiling deadline and buying longer-maturity bills, yields indicate. One-month rates touched 0.19 percent today, matching a 45-month high reached in November 2012, while the rate on three-month bills traded at 0.02 percent. The inversion of the spread was the biggest since September 2008.

“If you have one of these things and it’s maturing in the middle of October, at the end of October, you really don’t know what’s going to happen,” said Robert Tipp, chief investment strategist in Newark, New Jersey, for Prudential Financial Inc.’s fixed-income division, which oversees $395 billion in bonds. “That’s a far cry from riskless storehouse of nominal U.S. dollar value with unquestioned credit quality and 24-hour liquidity.”

Treasury Auctions

The U.S. will auction $30 billion of three-year notes on Oct. 8, $21 billion of 10-year debt on Oct. 9 and $13 billion of 30-year bonds on Oct. 10.

House Republicans are divided between those who insist on confrontation over the 2010 health-care law, President Barack Obama’s signature legislative achievement, and those who say they would support Senate Democrats’ spending bill. That measure would end the shutdown without conditions attached. Boehner told reporters today the way to reopen the government is for Democrats to negotiate and accept changes to the health law.

The House speaker has been telling fellow Republicans he won’t allow the U.S. to default on its debt, even if that requires Democratic votes, according to two Republican congressional aides. Party leaders were trying to package other Republican priorities with an increase of the $16.7 trillion debt-ceiling for a vote as soon as next week. The House will remain in session for a second straight weekend.

The “catastrophic” consequences of a default should the U.S. not raise the debt limit could lower investment and slower growth and may last for more than a generation, the Treasury Department said yesterday in a report.

Bond Insurance

Credit-default swaps insuring against losses on U.S. Treasuries almost doubled this week as the deadline for raising the nation’s $16.7 trillion debt limit approaches. The cost of one-year contracts jumped to 62 basis points from 33 basis points, according to date provider CMA, with the four-day partial government shutdown showing no sign of ending.

Trade volumes are also climbing, with swaps on Treasuries the 15th most active of 1,000 entities tracked by the Depository Trust & Clearing Corp. in the week through Sept. 27, up from 147th the previous period.

If the debt ceiling is reached, the Securities Industry and Financial Markets Association expects the Treasury will do day-to-day maturity extensions for securities and can’t redeem and coupon payments it can’t make, Rob Toomey, a trade-group official, said on a conference call.

The alternative to raising the debt limit “would be too awful to contemplate,” said Mohamed El-Erian, chief executive and co-chief investment officer at Pacific Investment Management Co., the world’s biggest manager of bond mutual funds. Most investors think a default will be avoided, he said on Bloomberg Television’s “In the Loop” with Betty Liu.

‘Some Realism’

“If the debt ceiling gets taken hostage by politicians, you will see a much different reaction,” El-Erian said from Pimco’s headquarters in Newport Beach, California. “The market expects as we get closer to Oct. 17 some realism will start occurring on Capitol Hill and politicians will avoid what potentially could be quite catastrophic both for the U.S. and the global economy.”

The Bloomberg U.S. Treasury Bond Index is little changed this month, after gaining 0.9 percent in September, which was the first increase since April. It has lost 2.4 percent this year, compared with a 2.7 percent drop in the Bloomberg Global Developed Sovereign Bond Index.

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