Treasuries Advance as Lawmakers Reach Tentative Fiscal Agreement

Rates on Treasury bills tumbled and yields on government notes and bonds fell as lawmakers reached a tentative agreement to raise the nation’s borrowing capacity and remove the risk of default.

Rates on $120 billion of bills maturing tomorrow, when Treasury Secretary Jacob J. Lew has said the U.S. will exhaust measures being used to keep the government funded, dropped to 0.035 percent after touching 0.36 percent. Optimism an agreement is at hand bolstered demand at today’s auctions of $68 billion of four- and 52-week bills and of 189-day cash management securities in what could have been the Treasury’s last opportunity to bring in new cash under the debt limit.

“Today’s outcome was the best option amongst a set of bad options,” Zach Pandl, a senior interest-rate strategist in Minneapolis at Columbia Management Investment Advisers, which oversees $340 billion, said in a telephone interview. “Most investors would agree that a much longer-term agreement would be better for markets and the economy, but we will take what we can get. The Treasury market is appropriately valued at the moment.”

One-month rates fell 21 basis points, or 0.21 percentage point, to 0.14 percent at 5 p.m. in New York after touching 0.45 percent, the highest since October 2008, according to data compiled by Bloomberg.

The benchmark 10-year note yield fell six basis points to 2.67 percent, according to Bloomberg Bond Trader data. The price of the 2.5 percent note due in August 2023 rose 17/32, or $5.31 per $1,000 face value, to 98 19/32.

Washington ‘Dysfunction’

Treasury trading volume at ICAP Plc, the largest inter-dealer broker of U.S. government debt, rose 44 percent to $384 billion, from $267 billion yesterday. The average this year is $316 billion.

Volatility in Treasuries as measured by the Bank of America Merrill Lynch MOVE index dropped to 73, the lowest level since Aug. 5. It climbed on Sept. 5 to 114.2, the highest level in two months. It touched a record low 49 in May.

“They are kicking the can down the road again,” said Kevin Giddis, senior managing director and head of fixed income in Memphis at Raymond James & Associates Inc. “It’s the dysfunction of Washington these days. We are going to turn our focus back to what’s driving the economy, plus the effect of 16 days of a partial shutdown. It will have some minor effect, which is why you are getting a rally in Treasuries.”

Treasury bills rates rose to recent highs amid concern the U.S. may default on its debt or delay payments to debt holders if Congress was unable to agree on a plan to increase the debt ceiling by tomorrow’s deadline.

Paying Bills

The rate on $120 billion of Treasury bills maturing tomorrow fell 28 basis points today after touching 0.51 percent on Oct. 10, the highest since they were sold a year earlier. The rate fell as low as negative 0.02 percent, the first time it crossed below zero since Sept. 26.

The Treasury should have enough money to pay off the Oct. 17 bills, according to Ira Jersey, an interest-rate strategist in New York at Credit Suisse Group AG, one of the 21 primary dealer obligated to bid at Treasury auctions. The U.S. raised $13 billion in “new cash” this week, which should leave the government with about $40 billion once the Oct. 17 securities mature, he said.

Historically Low

The next securities due after the Oct. 17 debt are $93 billion of debt maturing on Oct. 24. Rates on those bills touched 0.68 percent today, the highest since they were sold in April, before dropping by 28 basis points back to 0.19 percent. The rate was negative as recently as Sept. 27.

Rates remain lower than historical levels, with one-month rates averaging 1.5 percent in the past 10 years. During that time they climbed to a high of 5.26 percent in November 2006 and fell to as little as negative 0.09 percent in December 2008.

Two years ago, one-month rates climbed to a then-29-month high of 0.18 percent as the Aug. 2, 2011, deadline set by Treasury to avoid a default approached. They traded at negative 0.046 percent in December 2012 before a year-end trigger that forced automatic spending cuts and tax increases.

The shutdown has shaved at least 0.6 percent off annualized fourth-quarter 2013 gross domestic product growth, or taken $24 billion out of the economy, Standard & Poor’s said today. The ratings agency downgraded the U.S. on Aug. 5, 2011 to AA+ from AAA.

Economic Growth

The U.S. economy is forecast to grow 2.4 percent in the fourth quarter, according to the median estimate of 68 economists and strategists in a Bloomberg News survey completed Oct. 4 to 9.

The difference between what banks and the Treasury pay to borrow money for one month, known as the TED spread, inverted last week for the first time since Bloomberg started collecting the data in 2001. The gauge was at four basis points today.

The Bank of America Merrill Lynch U.S. Treasury Index has fallen 2.8 percent this year, heading for its first annual decline since 2009.

Today’s auction of $20 billion of four-week bills drew a rate of 0.24 percent, down from 0.35 percent at the last sale on Oct. 8 and up from an average of 0.07 percent at the past 10 sales. The bid-to-cover ratio, which gauges demand by comparing the amount bid with the amount offered, was 4.33, up from 2.75 at the previous sale that was the lowest since March 2009.

‘Risking Default’

The $22 billion of 52-week securities drew a rate of 0.16 percent, up from 0.12 percent at the last auction on Sept. 17 and an average of 0.13 at the previous 10 sales. The bid-to-cover ratio fell to 4.12 from 4.51.

The $26 billion 189-day cash-management bills sold with a rate of 0.135 percent and a bid-cover ratio of 3.83. The bills are used to meet the Treasury’s short-term cash needs in addition to the funds raised at regularly scheduled sales of bills and notes. Cash bills aren’t offered regularly and their maturities vary from auction to auction.

“The bill auction results on the margin reflect the idea that a debt-ceiling deal is somewhat more likely in light of the headlines,” said Ian Lyngen, a government-bond strategist at CRT Capital Group LLC in Stamford, Connecticut. “People will be hypersensitive to headlines as the debt ceiling deadline looms. It’s generally understood that the U.S. has a few more days before risking default.”

A $35 billion sale of three-month debt yesterday drew bids for 3.13 times the amount offered, the lowest level since July 2009. The figure was 3.52 at a $30 billion auction of six-month bills, the least since October 2009.

The overnight Treasury general collateral repo rate closed at 0.35 percent after opening at 0.30 percent, according to ICAP Plc, the world’s largest inter-dealer broker. It’s almost four times the 0.09 percent open at the start of last week.

The Fed purchased $1.46 billion in Treasuries maturing from February 2036 to August 2043 as part of its program to lower borrowing costs.

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