UPDATE 2-U.S. short-term rates rally on reports of debt deal

Wed Oct 16, 2013 10:24am EDT

NEW YORK Oct 16 (Reuters) - Yields on U.S. Treasury securities due this month fell from five-year highs on Wednesday on reports that U.S. Senate negotiations to raise the country's debt limit are nearing completion.

A Senate Democratic aide said that a deal could be announced soon.

The reports caused short-term debt yields to fall after a dramatic selloff earlier on Wednesday, as fears that lawmakers could let negotiations drag on increased aversion to debt at risk of delayed payments.

Money market funds, banks and others have been avoiding Treasuries that mature in late October and early November and the risk aversion has begun to seep into the $5 trillion repurchase agreement market, which many financial institutions rely on for short-term loans.

Interest rates on T-bills due Oct. 24 last traded at 0.41 percent on Wednesday in highly volatile activity. They fell as low as 0.22 percent on reports of an impending agreement on raising the debt ceiling. They traded as high as 0.72 percent.

While concerns over a potential default have been largely contained to short-term rate markets, many feared that turmoil may spread to other assets if an agreement to raise the debt ceiling is not reached soon.

"There is a specific risk that if the T-bills don't turn into money, the holders of T-bills need to get funding elsewhere, but the broader issue is if the government defaulted then it will make people sell stocks and risky assets more generally," said James Sweeney, senior global strategist at Credit Suisse in New York.

The cost to borrow overnight with loans backed by Treasuries also jumped to around 0.35 percent earlier on Wednesday. These had traded at around 0.10 percent before fears over the debt ceiling came to the fore.