GLOBAL MARKETS-Stocks jump, bill yields fall on views U.S. debt deal close
* Washington may be closing in on deal to resolve debt crisis * Wall Street up more than 1 pct, global stock index climbs * U.S. dollar up against yen, down against other major currencies * U.S. 1-year default swaps hit highest since July 2011 By Caroline Valetkevitch NEW YORK, Oct 16 (Reuters) - World equity markets rose and short-term Treasury debt rallied on Wednesday on renewed optimism U.S. lawmakers were closing in on a last-minute deal to prevent the country from defaulting on its debt. U.S. lawmakers were preparing a final push to lift the government's $16.7 trillion borrowing limit after a chaotic day of negotiations on Tuesday that left Senate aides claiming a deal was near despite finer details needing work. The latest push comes after days of political wrangling over the U.S. budget and the debt limit, which has sparked substantial preparation by dealers in government securities in case of a default. The sharp decline on Wednesday in near-term Treasury bill yields underscored the fluidity of the back-and-forth in Washington. Treasury bills maturing on October 24 spiked as high as 0.71 percent in the morning before reversing dramatically to yield 0.30 percent - still elevated, but nowhere near as stressed. The fixed income market has busied itself with preparations in case of a missed coupon payment, which would reverberate through the short-term repurchase market, a key source of overnight funding for banks and other institutions that depend on the use of Treasury securities as collateral. That market was effectively shut when Lehman Brothers collapsed in 2008, and endured severe strains in 2011 during the previous debt ceiling crisis. But if a deal is reached - even if it comes after the Treasury's estimated Oct. 17 deadline for being able to borrow - it will end up making this back-and-forth more like the fiscal ceiling debate in 2012, or the extensive preparations to prepare technology systems for the so-called Y2K bug in 2000. "If we don't get a default, it would be like Y2K. People were staying up all night worried about what would happen during that deadline. Then nothing happened," said David Keeble, global head of interest rate strategy with Credit Agricole Corporate & Investment Bank in New York, referring to Year 2000 and worries about the millennium computer bug. "In this case, all the switching out of T-bills and dealings with repos would be for naught if we don't default." News that an outline of a deal had emerged was enough to push U.S. stocks within striking distance of all-time highs and cause the CBOE Volatility index, Wall Street's favored index of anxiety, to fall 15 percent to 15.87. The Dow Jones industrial average leaped 196.83 points, or 1.30 percent, at 15,364.84. The Standard & Poor's 500 Index was up 22.75 points, or 1.34 percent, at 1,720.81. The Nasdaq Composite Index was up 44.55 points, or 1.17 percent, at 3,838.56. MSCI's world equity index, which tracks shares in 45 countries, was up 0.6 percent, not far from a five-year peak of 391.54 hit on Sept 19. "Market participants on balance believe something will get done, and it's going to get done in typical Washington fashion, at the eleventh hour," said Art Hogan, managing director at Lazard Capital Markets in New York. Worries over whether a resolution will happen have roiled markets, and late on Tuesday Fitch Ratings warned it could cut the U.S. sovereign rating from AAA, citing the impasse. If Washington does not reach a deal by Thursday, the U.S. government will by law no longer be able to add to the national debt and will have to rely on incoming revenue and about $30 billion in cash to pay the country's many obligations. That money is expected to run out quickly and the government would start missing payments in the weeks ahead. A global financial crisis could follow if investors decided that U.S. debt, used as collateral for trillions of dollars in financial deals, no longer provided adequate security. The uncertainty remained apparent in the U.S. debt market, where the cost of insuring one-year U.S. debt against default using credit default swaps recently hit its highest in over two years. The owners of more than 20 U.S. Treasury securities are seen most at risk as the U.S. Congress struggles to resolve the impasse, with the Federal Reserve almost certainly the largest holder. Even if a deal is reached, it must still clear the full Senate and possible procedural snags on Wednesday before moving to the fractious House of Representatives, which was unable to produce its own deal on Tuesday. With a large interest payment due at the end of the month and $58 billion in other obligations coming due the following day, many analysts have circled Oct. 31 as a possible date for default if Congress has still failed to reach an agreement. The dollar rose to near two-week high against the safe-haven yen even as it fell against the euro, sterling and Australian dollar. The dollar was up 0.3 percent at 98.42 yen, not far from the Oct. 1 high of 98.72. In the Treasury market, benchmark 10-year U.S. Treasuries slipped 3/32, their yield at 2.7295 percent. Gold prices dropped on expectations of a deal in Washington. Spot gold fell 0.6 percent to $1,272.40 an ounce.
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