T-Bills Tumble as Talks Push Default Concern Out the Bill Curve

Rates on Treasury bills maturing through the end of the year rose as officials in Washington sought a short-term budget agreement that may push back the deadline for a potential default by at least six weeks.

Rates on securities due in October fell from highs reached earlier in the week as those maturing in November and December rose on speculation that prolonged negotiations may put those securities at risk of default. The government has been partially shutdown since Sept. 30. Unless a deal is reached, the government’s authority to borrow will reach its limit on Oct. 17, according to the Treasury Department.

“The market is reevaluating the risks associated with short-term Treasury bills,” said Aaron Kohli, an interest-rate strategist in New York at BNP Paribas SA, one of 21 primary dealers that trade with the Federal Reserve. “People are happy to get out of these securities.”

Rates on debt due on Nov. 29 rose 12 basis points, or 0.12 percentage point, to 0.16 percent this week, according to Bloomberg Bond Trader prices. They were negative as recently as Sept. 30.

Yields on benchmark Treasury 10-year notes rose four basis points on the week to 2.69 percent. The price of the 2.5 percent security maturing August 2023 fell 11/32, or $3.44 per $1,000 face amount, to 98 12/32.

Treasury Auctions

The U.S. sold $64 billion of notes and bonds this week in the last offerings of debt with fixed coupon payments before its borrowing authority was projected to expire.

The $13 billion of 30-year bonds sold Oct. 10 drew the highest demand since February, after lackluster $13 billion three- and $21 billion 10-year note offerings, as lawmakers appeared to move closer to a budget deal.

The 21 primary dealers that serve counterparties to the Fed in its open market operations cut their holdings of Treasury bills to $16.2 bill for the week ended Oct. 2, the lowest since October 2012.

The cumulative short-term bill position of the dealers, including JPMorgan Chase & Co., Goldman Sachs Group Inc., and Barclays Plc, fell by $3.4 billion, or 17 percent, from a week earlier, central-bank data show. The holdings are down from $53.5 billion as of Sept. 11 and are at the lowest level since Oct. 31, 2012, the data show.

Historically Low

Rates on securities due in October fell from the highest levels this week as default speculation was pushed back into November.

The rate on $120 billion in bills due Oct. 17 dropped to

0.20 percent yesterday after touching 0.51 percent the day before. The rate on $93 billion in bills due Oct. 24 fell to

0.26 percent after climbing as high as 0.50 percent.

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.

President Barack Obama and House Republican leaders were moving toward an agreement to extend the nation’s borrowing authority through Nov. 22, even as they remained at odds over terms for ending a partial shutdown of the government. They met for 90 minutes at the White House on Nov. 10, and Obama hosted Senate Republicans yesterday.

‘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.”

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 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.

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.

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