Treasury rates jump on bills due on U.S. debt-ceiling deadline

Treasuries (CBOT:ZBZ13) 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.

“The risk of such an event is clear -- there’s just a market perception that it’s going from zero to something slightly more,” Ian Lyngen, a government-bond strategist at CRT Capital Group LLC in Stamford, Connecticut, said of a potential default. “The 10-year auction will be an indication of sponsorship for the Treasury market in this environment.”

Rates on Treasury bills due on Oct. 17 climbed 18 basis points, or 0.18 percentage point, to 0.46% at 3:55 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%. The 2.5% note due in August 2023 rose 7/32, or $2.19 per $1,000 face amount, to 98 20/32.

‘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 0.035%, down from 0.064% 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.”

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