Treasuries Advance as Debt-Ceiling Deadlock Boosts Safety Demand

U.S. Treasuries rose as investors sought safety and liquidity in the debt of the world’s largest economy amid a political deadlock in efforts to raise the debt ceiling and avoid the first American default.

Stocks declined as investors bought government debt after Treasury Secretary Jacob J. Lew said Congress needs to increase the borrowing limit by Oct. 17 or the nation will be unable to pay its bills. The difference in rates between one- and three-month bills rose to the widest gap since the 2008 financial crisis as investors sought a hedge against the risk of a default on bills maturing closest to the debt-ceiling deadline. Treasuries pared their advance before the U.S. sells $64 billion of notes and bonds this week.

“Uncertainty brings higher prices for Treasuries,” said Thomas di Galoma, head of U.S. rates sales at ED&F Man Capital Markets in New York. “I don’t think we’re going to default. This is a game of chicken, and it’s probably going to continue.”

The benchmark 10-year yield fell two basis points, or 0.02 percentage point, to 2.63 percent at 5 p.m. in New York after dropping as much as four basis points, according to Bloomberg Bond Trader prices. The 2.5 percent note maturing in August 2023 rose 5/32, or $1.56 per $1,000 face amount, to 98 28/32.

The Standard & Poor’s 500 Index of stocks declined 0.9 percent.

Debt Auctions

Bonds trimmed gains likely due to “concern over demand at the Treasury’s auctions this week,” said Gary Pollack, who manages $12 billion as head of fixed-income trading at Deutsche Bank AG’s Private Wealth Management unit in New York.

“Given the government shutdown, given the concerns or threats by certain people in Washington that the U.S. could default,” said Pollack, “that could cause international investors maybe not to step up in the same fashion that they did in the past.”

The U.S. auctions $30 billion of three-year debt tomorrow, $21 billion of 10-year securities on Oct. 9 and $13 billion of 30-year bonds on Oct. 10.

The difference in rates between one- and three-month bills reached 13.7 basis points, the biggest since September 2008. The bill maturing Oct. 24 climbed to as high as 0.18 percent, while rates on three-month bills touched 0.03 percent.

Past Crises

Two years ago, one-month bill rates 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 0.015 percent in December 2012 before a year-end trigger would force automatic spending cuts and tax increases.

Three-month Treasury bill rates touched negative 0.0101 percent on Sept. 27, the lowest level this year. The 2013 average is 0.048 percent. The three-month rate 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.

During periods of uncertainty, investors typically seek a haven in Treasuries because of the depth and liquidity of the $11.6 trillion market, and because they are issued in dollars, the world’s reserve currency. Treasuries rallied, with the 10-year yield falling 0.5 percentage point, in the two weeks after S&P downgraded the U.S. credit rating to AA+ in August 2011.

Repo Rates

The average level of overnight Treasury general collateral repo rates traded through 10 a.m. New York time with ICAP Plc, the world’s largest inter-dealer broker was 0.08 percentage point, less than the 0.11 percentage point average for the year and compared with 0.32 percentage point on Aug. 1, 2011, the day before the U.S. was projected to reach its borrowing limit then.

The surge in the rate then came when money-market mutual funds scaled back investing amid concern the value of the Treasury debt they held as collateral against the agreements would slide if the looming debt-ceiling deadline wasn’t extended.

Bank of America Merrill Lynch cut its forecast for fourth-quarter U.S. economic growth to 2 percent from 2.5 percent, the company said in a report Oct. 4. The U.S. will probably have a two-week government shutdown with no violation of the debt ceiling, the report said.

The Obama administration has said it won’t negotiate with Republicans over funding the government or raising the debt ceiling, arguing that it is part of the basic functions of Congress and shouldn’t be used as point of leverage.

‘Held Hostage’

Speaker John Boehner said yesterday in an interview on ABC that the House of Representatives can’t pass an increase to the debt ceiling without packaging it with other provisions. He and other Republicans have sought to end the shutdown by passing legislation that would also delay for one year the mandate for individuals to purchase health insurance, a part of Obama’s 2010 Affordable Care Act.

“The market has been held hostage and traders are being forced to sit around and watch screens, waiting for headlines that are taking their sweet time,” Larry Milstein, managing director in New York of government-debt trading at R.W. Pressprich & Co. “We aren’t going to move out of the 2.65 percent-to-2.59 percent range until we get some sort of resolution.”

The central bank buys $85 billion of Treasury and mortgage debt each month to put downward pressure on borrowing costs, and signs of economic improvement earlier in 2013 had raised bets Chairman Ben S. Bernanke was preparing to reduce purchases.

Bank of America predicts the Fed to start tapering asset purchases in January, from a previous estimate of December, Wraith said.

Treasuries lost investors 2.52 percent this year, according to the Bloomberg U.S. Treasury Bond Index. The Bloomberg Global Developed Sovereign Bond Index has lost investors 2.9 percent in that time.

Before it's here, it's on the Bloomberg Terminal.