Treasuries end advance as U.S. prepares debt sales amid shutdown

‘Catastrophic’ Effects

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 “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% in September, which was the first increase since April. It has lost 2.4% this year, compared with a 2.7% drop in the Bloomberg Global Developed Sovereign Bond Index.

The U.S. Department of Labor postponed the September payroll report scheduled for today because of the shutdown of nonessential government services. An alternative date for the employment report, usually released on the first Friday of each month in Washington, hasn’t been scheduled, the department said in a statement.

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