Treasury Rates Jump on Bills Due on Debt Deadline as Gross Buys

Treasuries fell and rates surged on bills maturing on the Oct. 17 deadline projected for when the U.S. reaches its borrowing capacity as investors avoided the securities with the risk of default rising.

Yields on benchmark 10-year notes increased for a second day as the U.S. auction of $21 billion of the debt drew lower-than-average demand. They extended gains after minutes of the Federal Reserve’s last meeting showed most policy makers said the central bank was likely to reduce the pace of its bond purchases this year after it refrained from tapering in September. Treasuries rose earlier after a White House official said Janet Yellen would be nominated to head the Fed.

“We pick up pennies on the street, and this is a particular penny we think is risk free,” Bill Gross, manager of the world’s biggest bond fund at Newport Beach, California-based Pacific Investment Management Co., said of buying Treasury bills during an Bloomberg Television interview. “When you analyze it from the standpoint of odds, it’s probably a 250,000-to-one-type of bet that there is a technical default or a default on a Treasury bill. We think it’s almost impossible.”

Rates on Treasury bills due on Oct. 17 climbed 20 basis points, or 0.20 percentage point, to 0.478 percent at 5 p.m. New York time, according to Bloomberg Bond Trader prices. They jumped 14 basis points yesterday after being negative as recently as Sept. 26.

The current 10-year yield rose three basis points to 2.66 percent. The 2.5 percent note due in August 2023 rose 1/4, or $2.50 per $1,000 face amount, to 98 19/32.

‘Potential Default’

Rates on bills due in October rose after President Barack Obama rejected calls to invoke the Constitution’s 14th Amendment to skirt Congressional approval for issuing new debt. His stance places the onus on Congress to strike a deal ending the week-old government shutdown and raising the debt limit by Oct. 17, or face default, according to Treasury Department forecasts.

While rates jumped on bills maturing Oct. 17, those due Nov. 21 were little changed at 0.043 percent, down from 0.064 percent on Oct. 4, the highest level since July 3.

“Yields on maturities from Oct. 17 to Nov. 14 reflect money-market math that suggests principal payments on bills are delayed for three-five weeks past regular payment dates,” Jim Vogel, head of agency-debt research at FTN Financial in Memphis, Tennessee, wrote in a note. “As it is unlikely that’s the real expectation of owners of those bills, levels reflect concerns about operational and explanation risk rather than panic about potential default.”

Citigroup Survey

Two-thirds of respondents in a Citigroup Inc. survey said money-market funds will be most compelled to sell securities on a Treasury default. About 35 percent of respondents expect Treasury yields to rise by more than 50 basis points on a default, while 10 percent expect yields to fall by more than 50 basis points, according to polling conducted Oct. 7-9.

About 40 percent of respondents also expect central banks, money managers and insurance companies to feel the pressure to sell Treasuries, the survey said.

“We do believe that Congress will take the steps needed to increase the debt ceiling and avoid default,” said Nancy Prior, head of money funds at Boston-based Fidelity Investments, the largest U.S. provider of money funds, during a telephone interview. “Nonetheless, we have been taking precautionary measures and preparing contingency plans. We have avoided maturities in the time period toward the end of October.”

Repo Rates

Rates to borrow and lend Treasuries in the repurchase-agreement market rose as investors step back from transactions in securities that mature around the date the government has said it will reach its $16.7 trillion debt limit.

The overnight Treasury general collateral repo rate opened at 0.16 percent, according to ICAP Plc, the world’s largest inter-dealer broker, up from the open yesterday of 0.09 percent and in line with the end-of-day rate of 0.17 percent.

“Most participants viewed their economic projections as broadly consistent with a slowing in the pace of the committee’s purchases of longer-term securities this year and the completion of the program in mid-2014,” according to the record of the Federal Open Market Committee’s Sept. 17-18 gathering, released today in Washington.

The FOMC held off tapering $85 billion in monthly bond purchases last month and indicated that budget cuts and an increase in borrowing costs were drags on expansion. Policy makers wanted to see more evidence of steady growth to combat 7.3 percent unemployment, they said in a statement.

‘Same Cloth’

Obama announced his selection of Yellen, the current Fed vice chairman, in a ceremony at the White House that included Chairman Ben S. Bernanke. Bernanke, whose term ends Jan. 31, cut interest rates to a record of almost zero in 2008 and began the bond-buying program, known as quantitative easing, to put downward pressure on borrowing costs.

“Yellen and Bernanke are cut from the same cloth,” said Richard Clarida, a former assistant Treasury secretary who is now an executive vice president at Newport Beach, California-based Pacific Investment Management Co., and professor of economics at Columbia University in New York, in an interview on Bloomberg Television with Tom Keene. An early task will be to “lay out tapering and reduction of the Fed’s QE. At some point in 2014, it’s very likely the Fed will be tapering.”

Treasuries due in one to 10 years have fallen 1.2 percent in 2013, while those maturing in a decade or longer tumbled 9.2 percent, based on Bloomberg World Bond Indexes.

Shorter-maturity U.S. notes tend to follow what the Fed does with its target for overnight lending between banks, while longer-dated bonds are more influenced by the inflation outlook.

Notes Auction

The difference between yields on 10-year notes and similar-maturity Treasury Inflation Protected Securities, a gauge of expectations for consumer prices over the life of the debt, was little changed at 2.21 percentage points. The spread expanded to 2.27 percentage points on Sept. 23, the most since Aug. 13.

Today’s 10-year auction drew a yield of 2.657 percent, compared with 2.946 percent at last month’s sale. The bid-to-cover ratio -- which gauges demand by comparing total bids with the amount of securities offered -- was 2.58, compared with an average of 2.76 for the previous 10 sales.

“There was some concern because it’s the last supply we get before the deadline,” said Jason Rogan, managing director of U.S. government trading at Guggenheim Securities LLC, a New York-based brokerage for institutional investors. “There are a lot of people waiting to get clarity on what’s going on in D.C. with the shutdown and with the debt ceiling. It’s keeping people a little bit cautious.”

Bond Sale

Indirect bidders, an investor class that includes foreign central banks, purchased 38.6 percent of the notes at today’s sale, compared with an average of 37.3 percent for the past 10 sales.

Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased 21.2 percent of the notes, compared with an average of 23.1 percent at the previous 10 auctions.

Ten-year notes have lost 5.6 percent this year, compared with a 2.5 percent drop in the broader U.S. Treasuries market, according to Bank of America Merrill Lynch indexes. The benchmark notes returned 4.2 percent in 2012, versus a 2.2 percent gain by Treasuries overall.

The auction was the second of three offerings this week as the government sells $64 billion of notes and bonds. The U.S. sold $30 billion of three-year debt yesterday at a yield of 0.71 percent and will auction $13 billion of 30-year bonds tomorrow.

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.

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