UPDATE 2-U.S. opens T-bill spigot as debt ceiling nears

Mon Feb 10, 2014 4:30pm EST

* U.S. sells record amount of 3-month, 6-month bills

* Treasury sells $50 bln cash management bills

* T-bill rates retreat on speculation over debt limit hike

By Richard Leong

NEW YORK, Feb 10 (Reuters) - The U.S. government flooded the U.S. bond market with over $100 billion in ultra short-term debt on Monday as the month-end deadline on the federal debt ceiling draws closer.

The U.S. Treasury sold a combined $134 billion in bills, which some analysts reckoned is the biggest single-day supply of U.S. T-bills ever.

This record supply of T-bills, together with worries the government will be unable to increase its $16.7 trillion borrowing limit by late February, pushed up what the government paid investors and dealers to buy short-term debt.

Growing risk that Uncle Sam might delay its payments on its debt obligation drove T-bill rates to their highest levels since mid-October. Four months ago during the last debt ceiling fight between President Barack Obama and top Republican lawmakers, T-bill rates jumped to levels not seen since the global financial crisis.

The U.S. Treasury Department has repeatedly warned the government will run out of cash to pay its debt obligations, federal payrolls and retirement benefits by the end of February.

"The auctions went well all things considered," said Thomas Simons, money market strategist at Jefferies & Co. in New York.

T-bill rates retreated from their earlier levels in afternoon trading following the auctions, on news Republican lawmakers will meet later on Monday to consider how to handle the debt ceiling issue.

"There is a growing sense of optimism that this will be handled more smoothly than last time," Simons said.

President Obama and Republicans struck a deal last October to temporarily increase the debt ceiling. The Treasury now has to use emergency measures to cobble up enough cash before hitting the debt limit in a few weeks.

"Congress is likely to enact an increase in the debt limit before the end of February. There is no appetite - particularly among House Republicans - for a repeat of the high-stakes battle over the debt limit that occurred last fall," Stone & McCarthy Research Associates analyst Nancy Vanden Houten wrote in a research note on Monday.

T-BILL FLOODGATE

The Treasury Department on Monday said it would pay dealers and investors 0.095 percent on $42 billion of its three-month debt due on May 15.

It would pay 0.11 percent on $42 billion of six-month T-bills that mature on Aug. 14.

The amount of three-month bills sold surpassed the prior record of $35 billion, while the amount of six-month debt sold eclipsed the previous high of $31 billion.

The Treasury also sold $50 billion in 72-day cash management bills at an interest rate of 0.090 percent, slightly below what traders had expected.

Treasury issues cash management bills to raise money for tax refunds and other short-term purposes. This short-term debt has irregular maturity dates.

On Tuesday, it will auction $8 billion in one-month bills , marking the second consecutive week the government will sell this amount of the T-bill maturity, which is the smallest since April 2008.

The Treasury's juggling of its debt issuance has been part of its attempt to ensure the government pays its bills on time as it approaches its borrowing limit.

It is unclear whether Republicans will reach a consensus on handling the debt ceiling. Back in October, disagreement among GOP lawmakers roiled the T-bill sector, rippling across financial markets in fears the U.S. might delay its debt payments, resulting in a "technical" default.

Texas Republican Senator Ted Cruz, known for his tough stand on fiscal matters, said on Monday it would be "irresponsible" for Congress to grant President Barack Obama a debt limit increase without also insisting on spending cuts.

On the open market, the interest rate on one-month T-bills was last 0.070 percent, down nearly 3 basis points from late on Friday after rising to slightly over 0.100 percent earlier.

The three-month T-bill rate fell to 0.065 percent from 0.080 percent late on Friday, while the six-month bill rate slipped to 0.073 percent from 0.083 percent on Friday.

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