GLOBAL MARKETS-U.S. short debt rates up on default fear; dollar steadies
* U.S. budget deadlock continues, short-dated yields rise
* Dollar edges off near 8-month low vs major currencies
* World shares and oil trade in narrow ranges
By Barani Krishnan
NEW YORK, Oct 8 (Reuters) - Interest rates on short-dated U.S. government debt hit the highest in more than two years on Tuesday as anxiety rose over whether the United States will avert a debt default, while stocks slipped and the dollar edged higher after days of losses.
With the partial U.S. government shutdown in its second week and only nine days left for Congress to act before an Oct. 17 U.S. debt ceiling deadline, President Barack Obama said he would accept a short-term increase to avoid a default.
Yields on short-dated bills maturing in the next few weeks were on the rise ahead of auctions scheduled later in the day, a sign of concern about repayment. The one-month T-bill rate rose above the one-month London interbank offered rate, or LIBOR, for the first time at least 12 years, according to Reuters data.
"The markets now view lending money to the U.S. for one month riskier than lending money to a bank for one month," said Guy LeBas, chief fixed-income strategist with Janney Montgomery Scott in Philadelphia.
The U.S. Treasury Department will sell $30 billion in new one-month bills at 11:30 a.m. EDT (1530 GMT), followed by a $30 billion auction of three-year notes at 1 p.m. (1700 GMT).
The benchmark 10-year U.S. Treasury note was down 2/32, its yield at 2.6357 percent, while oil and gold prices rose.
On Wall Street, the Dow Jones industrial average was down 71.19 points, or 0.48 percent, at 14,865.05. The Standard & Poor's 500 Index was down 9.35 points, or 0.56 percent, at 1,666.77. The Nasdaq Composite Index was down 46.06 points, or 1.22 percent, at 3,724.31.
Global stocks as indicated by the 45-country MSCI world equity index were off 0.4 percent.
European equities traded lower after ending in negative territory for three of the last four trading sessions. The broad FTSE Eurofirst 300 index dipped 0.77 percent.
A White House spokesman said on Monday the Obama administration would accept a short-term increase in the nation's borrowing authority to avoid a default.
As the partial U.S. government shutdown enters a second week, most investors still believe Republicans and Democrats can reach deals on the budget and the debt ceiling. But worries they may fail were beginning to grow.
"In our opinion markets are a little too complacent. The downside risks are horrendous if there is no resolution and the debt ceiling is breached," said Kevin Corrigan, head of credit at Lombard Odier Investment Managers.
However, the broad S&P 500 has declined by only about 3 percent from all-time highs reached in September, as many investors expect a rally once the budget and debt ceiling fights are resolved.
The CBOE Volatility Index, a measure of Wall Street's anxiety, dipped to 19.08 on Tuesday, down from 19.41. That level is consistent with rising concern, but not outright fear.
"I'm prepared to step out at any time should it come crashing down, but for the moment I'm still betting on the upside," said Andreas Clenow, hedge fund trader and principal of Zurich-based ACIES Asset Management.
The dollar fell against the perceived safety of the yen to hit 97.05 yen. It had dropped earlier to 96.55 yen, its lowest since Aug. 12.
The dollar index, which measures the U.S. currency's value against a basket of currencies,, was off 0.06 percent and within striking distance of last week's eight-month low of 79.627. Traders said it remained vulnerable to further selling.
The longer the political deadlock runs, the greater the expected economic damage and the more likely it becomes that the Federal Reserve will maintain its stimulus program, which has flooded global markets with dollars.
The biggest U.S. creditors, China and Japan, have said they are increasingly worried that the developments in Washington could wreak havoc on their trillions of dollars of investments in U.S. Treasury bonds.
"The risk is to the downside for the dollar as long as we don't have an agreement," said Niels Christensen, currency strategist at Nordea.
Banks and investors outside the United States were moving to ensure a steady supply of dollars to cover the critical mid-October period when the government hits the borrowing limit, paying sharply higher premiums in the forward foreign exchange market.
Gold prices rose above $1,328 an ounce as buyers in China, the second-largest market for bullion after India, returned from a week-long holiday.
Benchmark Brent crude oil traded above $110 a barrel, although the gains were expected to be short-lived given an improved supply outlook and fallout from the U.S. budget crisis. U.S. crude was up 44 cents at $103.47.
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