* Weak demand for U.S. short-term bills highlights debt
* High-flying stocks hit as investors pull back from gains
* Dollar edges off near 8-month low vs major currencies
* World share markets, oil, trade in narrow ranges
By Barani Krishnan
NEW YORK, Oct 8 Interest rates on one-month U.S.
government debt hit a 5-year peak on Tuesday and stocks on Wall
Street closed lower as anxiety rose on whether the United States
will avert a debt default.
With the partial U.S. government shutdown in its second week
and only nine days left for Congress to act before an Oct. 17
debt ceiling deadline, markets showed increasing signs of worry.
President Barack Obama said he would accept a short-term
increase to avoid a default but negotiations have not proceeded.
Obama suggested Republicans were resorting to "hostage"
tactics, demanding concessions before raising the federal
borrowing limit or passing a budget that would end the partial
government shutdown that began last week.
Yields on short-dated bills maturing in the next few weeks
rose sharply, and the Treasury sold $30 billion in four-week
bills at 0.35 percent, the highest yield since October 2008.
Demand was the weakest in four-and-a-half years, as investors
have become concerned about the potential for a missed payment
if the Treasury's borrowing authority is not extended.
"This is the canary in the coal mine," said Eric Green,
global head of rates, currency and commodity research at TD
Securities in New York. "You could see this seep into other
markets. The next shoe to drop is for stocks to drop further.
That's why you want the safety of gold and longer-dated
For its three-year auction, the Treasury sold $30 billion at
0.71 percent, indicating more demand for longer-dated issues.
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.
One-month U.S. yields were at 0.36 percent, nearing the same
yield as two-year notes, at 0.37 percent. A survey
from J.P. Morgan Securities released on Tuesday showed investors
continued to raise their holdings of longer-dated Treasuries, in
lieu of short-dated bills.
The benchmark 10-year U.S. Treasury note was
down 2/32, its yield at 2.6375 percent.
Wall Street's technology-heavy Nasdaq index dropped more
than 2 percent at one point after Obama said economic shutdown
due to a default would raise the risk of a deep recession.
The Dow Jones industrial average ended down 159.71
points, or 1.07 percent, at 14,776.53. The Standard & Poor's 500
Index was down 20.67 points, or 1.23 percent, at
1,655.45. The Nasdaq Composite Index was down 75.54
points, or 2.00 percent, at 3,694.83.
Global stocks as indicated by the 45-country MSCI world
equity index were off 0.7 percent.
Many investors believe Republicans and Democrats can still
reach deals on the budget and the debt ceiling. Obama concurred
as much by reiterating on Tuesday that the United States has
always paid its bills.
Such optimism is causing many investors to bank on a rally
once the budget and debt ceiling fights are resolved. While
stocks are on the decline, the broad S&P 500 has fallen by only
about 3 percent from all-time highs reached in September.
Even so, worries about a default are taking hold among some.
The CBOE Volatility Index, a measure of Wall Street's
anxiety, rose to 20.66, up from Monday's 19.41 and the first
time that index has hit 20 since June, a sign of rising concern.
Technology stocks were the worst performers of the day, with the
S&P information technology index down 1.3 percent.
"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.
European equities ended down for a second straight session.
The broad FTSE Eurofirst 300 index dipped 0.8 percent.
The dollar fell against the perceived safety of the yen to
trade at around 97 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 up slightly but
within striking distance of last week's eight-month low of
79.627. Traders said the currency remained vulnerable to more
The longer the political deadlock runs, the greater the
economic damage and the more likely 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 the developments in
Washington could wreak havoc on their trillions of dollars of
investments in U.S. Treasury bonds.
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
Gold prices were little changed at around $1,320 an ounce,
while benchmark Brent crude oil settled up 48
cents at $110.16 a barrel and U.S. crude finished up 46
cents at $103.49.. But the gains were expected to be
short-lived given an improved supply outlook and fallout from
the U.S. budget crisis.