Treasury one-month bill rates surged to the highest since 2008 and yields on three-year notes rose as the U.S. sold $30 billion of the debt in the first auction of coupon securities since the start of the government shutdown.
The Treasury sold $30 billion of one-month bills at a rate of 0.35 percent, the highest since November 2008 and more than double the rate on comparable one-month securities yesterday. China and Japan, America’s largest foreign creditors with combined holdings of more than $2.4 trillion, raised pressure on the U.S. to resolve the political impasse. The three-year notes attracted higher-than-average demand from an investor class that includes foreign central banks.
“There’s nervousness in the bills sector,” said Sean Simko, who oversees $8 billion at SEI Investments Co. (SEIC:US) in Oaks, Pennsylvania. “Demand remains outside the money-market arena for Treasury securities. The market is looking to the figureheads in government to provide clarity and direction on which way this is going.”
The U.S. three-year yield rose four basis points, or 0.04 percentage point, to 0.67 percent at 5 p.m. New York time, according to Bloomberg Bond Trader prices. The price of the 0.875 percent note maturing in September 2016 fell 3/32, or 94 cents per $1,000 face value, to 100 19/32.
Benchmark 10-year yields rose one basis point to 2.63 percent, after rising as much as three basis points.
Treasury trading volume at ICAP Plc, the largest inter-dealer broker of U.S. government debt, rose 83 percent to $378.3 billion, from $206 billion yesterday. It was the biggest jump since July 31. The average this year is $316 billion.
Volatility in Treasuries as measured by the Bank of America Merrill Lynch MOVE index was little changed at 81. It climbed on Sept. 5 to 114.2, the highest level in two months. It touched a record low 49 in May.
Today’s one-month bill auction had a bid-to-cover ratio -- which gauges demand by comparing total bids with the amount of debt offered -- of 2.75, the lowest since March 2009. Indirect bidders, a category that includes foreign central banks, purchased 31 percent of the securities, the most since May.
“This uncertainty in Washington is causing troubles in the market, mostly in the front end, on whether issues maturing around that time will be paid off,” said Ray Remy, head of fixed income in New York at Daiwa Capital Markets America Inc., one of 21 primary dealers obligated to bid at Treasury auctions.
The difference in rates between one- and three-month bills reached 28.9 basis points, the biggest since March 2008, according to closing-market data. Three-month bill rates climbed as high as 0.1014 percent after touching negative 0.0101 percent on Sept. 27, the lowest level this year. The 2013 average is 0.047 percent. One-month bill rates rose 18 basis points to 0.33 percent.
Rates on bills due Nov. 21, just over a month after the debt-ceiling deadline, are 0.04 percent, down from 0.06 percent reached Oct. 4, the highest level since July 3.
While rates more than doubled on one-month bills, today’s increase pales in comparison with historical moves. Rates surged 39 basis points to 0.45 percent on Oct. 21, 2008, when the Fed invoked emergency authority and agreed to provide up to $540 billion in loans to help relieve pressure on money-market mutual funds beset by redemptions.
One-month bill rates averaged 2.47 percent in the decade before the Fed reduced its target rate for overnight loans between banks to a range of zero to 0.25 percent in December 2008.
The average level of overnight Treasury general collateral rose today as repo rates traded through 10 a.m. New York time with ICAP Plc, the world’s largest inter-dealer broker, was 0.17 percentage point, almost doubling the 0.09 percentage point at the start of the day. The rate climbed to 0.32 percentage point on Aug. 1, 2011, the day before the U.S. was projected to reach its borrowing limit then.
At today’s three-year note auction, indirect bidders purchased 34.4 percent of the notes, compared with an average of 28.2 percent of the securities for the past 10 auctions.
Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, bought 19.7 percent, compared with an average of 18.8 percent at the past 10.
The notes yielded 0.71 percent, compared with a forecast of 0.718 percent in a Bloomberg News survey of eight primary dealers. The bid-to-cover ratio was 3.05, versus an average of 3.35 at the past 10 sales.
Japan must consider the impact of any default on its bond holdings, even as the U.S. will probably avoid a fiscal crisis, Japanese Finance Minister Taro Aso said today in Tokyo. Chinese Deputy Finance Minister Zhu Guangyao said yesterday that the U.S. should prevent a default, the People’s Daily reported.
“US Treasury debt is foundation for all global credit & equity,” Bill Gross, co-founder of Pacific Investment Management Co. and manager of the world’s biggest bond mutual fund, wrote today in a comment on Twitter. “Default? Make disaster’s day.”
Nonessential U.S. government services have been closed for a week as politicians wrangle over a budget. President Barack Obama said today at a White House news conference that negotiations “shouldn’t require hanging the threat of a government shutdown or economic chaos over the heads of the American people.” Republicans have sought changes to the 2010 Affordable Care Act in exchange for raising the ceiling.
Treasury Secretary Jacob J. Lew said Congress needs to increase the debt ceiling by Oct. 17 or the nation risks defaulting on its payments.
The International Monetary Fund warned that a U.S. government default could “seriously damage” the world economy.
Treasury investors were more bullish for the fourth straight week ending yesterday, betting that the prices of the securities will rise, according to a JPMorgan Chase & Co. survey.
The proportion of net longs climbed to 10 percentage points, the highest since July, up from 6 in the week ending Sept. 30, according to JPMorgan. The percentage of outright longs, or bets the securities will increase in value, rose to 23 percent from 21 percent. Outright shorts dropped to 13 percent from 15 percent. Neutral bets held steady at 64 percent.
The size of today’s three-year offering was the smallest since January 2009 and the second consecutive reduction after remaining at $32 billion for 35 sales beginning October 2010. The size peaked at $40 billion from November 2009 through April 2010.
Three-year notes have lost 0.1 percent this year, compared with a decline of 2.5 percent by Treasuries overall, according to Bank of America Merrill Lynch indexes. The three-year securities returned 0.6 percent in 2012, while Treasuries overall gained 2.2 percent.
Today’s offering was the first of three note and bond auctions this week totaling $64 billion. The government will sell $21 billion in 10-year debt tomorrow and $13 billion in 30-year securities on Oct. 10.
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