Treasuries snapped a two-day advance as the U.S. prepared to auction $64 billion of notes and bonds next week and the partial shutdown of the government persisted for a fourth day without signs of ending.
Benchmark 10-year note yields rose from almost a seven-week low, trading in the tightest weekly range in almost six months. One-month bill rates matched the highest level since 2009. House Speaker John Boehner tried to unite Republicans on a plan to reopen the government, raise the debt limit and achieve as many party priorities as possible. The Treasury has said it will exhaust measures to avoid exceeding the borrowing limit Oct. 17.
“Supply is a factor and will be a factor,” said Ray Remy, head of fixed income in New York at Daiwa Capital Markets America Inc., one of 21 primary dealers that trade with the Federal Reserve. “We’re just careening forward, waiting for news out of Washington.”
Ten-year U.S. yields climbed five basis points, or 0.05 percentage point, to 2.66% at 1:20 p.m. New York time, Bloomberg Bond Trader data show. The price of the 2.5% debt due August 2023 fell 14/32, or $4.38 per $1,000 face amount, to 98 21/32. The yields have traded this week between 2.66% and 2.58%, the narrowest range since April. The bottom of the range was the lowest level since Aug. 12.
Rates on Treasury bills that mature Oct. 24 traded at 0.14% today, from negative 0.01% on Sept. 27, as investors demanded extra compensation for the risk of holding the securities.
Money managers are getting out of Treasuries maturing closest to the debt-ceiling deadline and buying longer-maturity bills, yields indicate. One-month rates touched 0.19% today, matching a 45-month high reached in November 2012, while the rate on three-month bills was 0.02%, the biggest inversion of the spread since September 2008.
The U.S. will auction $30 billion of three-year notes on Oct. 8, $21 billion of 10-year debt on Oct. 9 and $13 billion of 30-year bonds on Oct. 10.
Concern about the looming debt-ceiling deadline may grow next week as the Treasury sells the debt, said Jim Vogel, head of agency-debt research at FTN Financial in Memphis, Tennessee.
“You’re always going to get more tense the closer you get” to a deadline, Vogel said. “I don’t think we’ll have a great read on that until we’re through the 10-year auction.”
House Republicans are divided between those who are insisting on confrontation over the nation’s 2010 health-care law, Obama’s signature legislative achievement, and those who say they would support Senate Democrats’ spending bill. That measure would end the shutdown without conditions attached. Boehner told reporters today the way to reopen the government is for Democrats to negotiate and accept changes to the health law.
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.
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.
“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.