* U.S. one-month T-bill rates hit highest since November
* Treasuries CDS prices nearing 2011 debt-fight levels
* U.S. jobless claims little changed in latest week
By Ellen Freilich
NEW YORK, Oct 3 U.S. Treasuries prices rose and
yields eased on Thursday as an ongoing contest in Washington
that has shut much of the government and left the debt ceiling
problem unresolved inspired investors to buy U.S. debt, still
the most viable safe haven.
Given the gridlock over the budget and healthcare reform
that led to a partial government shutdown that began on Tuesday,
investors are increasingly worried the lawmakers will not agree
on a deal to increase the statutory $16.7 trillion borrowing
limit by the Oct. 17 deadline.
Failure to increase the debt ceiling, they fear, would
unleash market chaos and damage the long-term creditworthiness
of the U.S. government and the safe-haven status of the dollar.
"At this point, the market seems to have a pretty high
degree of confidence the Treasury will not miss or delay a
principal or interest payment - that other things will give
before that gives," said Robert Tipp, chief investment
strategist at Prudential Fixed Income, with $400 billion in
assets under management, in Newark, New Jersey.
"But if that assumption comes into question you will see the
orderly repricing that is going on right now become disorderly,"
he said. "For the market, any significant doubt as to the timely
payment of interest or principal on Treasury securities would be
tantamount to the earth ceasing to rotate on its axis."
As concerns over a possible U.S. default have intensified,
the cost to insure Treasuries has soared in the credit default
swaps market, though analysts qualify that by noting that that
market is not particularly broad or deep.
Investors would pay about 46,000 euros to insure 10 million
euros worth of Treasuries for a year on Thursday, according to
Markit. This was the highest premium on one-year U.S. sovereign
debt since July 2011 during the first debt ceiling showdown
between President Barack Obama and top Republican lawmakers.
BILL YIELD CURVE INVERTS
Another symptom of debt ceiling stress was evident in the
inverted bill yield curve. While six-month bill yields normally
would be slightly higher than those on shorter-term bills,
yields on bills set to mature on Oct. 31, just two weeks after
the Oct. 17 date by which the Treasury has said the debt ceiling
must be raised, have risen above six-month bill rates.
Interest rates on Treasury bills that will come due between
the debt ceiling deadline and the end of October also rose on
default worries. The rate on the T-bill issue due Oct. 31
touched 0.17 percent, its highest since November.
This compared with 0.03 percent on the T-bill due the following
"It's not a big move in bills. No one is really concerned
about not getting their payment. But the market is kind of tough
right now. People are skittish," said Matthew Duch, portfolio
manager at Calvert Investments in Bethesda, Maryland.
That skittishness certainly was evident on Wall Street where
major stock indexes fell about 1 percent in morning trade.
The losses on Wall Street encouraged a move to Treasuries,
boosting benchmark 10-year notes 5/32 in price as
their yields eased to 2.61 from percent from 2.63 percent late
on Wednesday, close to a seven-week low.
Strategists cited technical resistance at 2.60 percent for
the 10-year yield and said if the yield slipped to trade below
that level for a sustained period, the next move would be down
to 2.45 percent.
The inability to collect data on the economy during the
government shutdown and the likelihood the data would not be
that robust once it is published argue against the Federal
Reserve being able to accomplish any tapering of its policy to
stimulate the economy by keeping interest rates low and buying
$85 billion a month in Treasury and mortgage-backed securities.
"We won't have an employment report on Friday and the Fed is
very keyed into employment indicators," said Gabriel Mann, U.S.
rates strategist at RBS. "If the shutdown goes on, you can all
but rule out an October taper announcement."
The longer the shutdown persists, the less probable a
December tapering looks, Mann said.
"Also, markets are thin in December and the Fed is cognizant
that rising rates could hurt everything they've been trying to
accomplish," Mann said. "Tapering in thin markets could cause an
even more adverse reaction and a sharper selloff in rates."
With a new Fed chair arriving in January, "we think tapering
will be pushed to the March statement," Mann said.
While yields remained lower on the day, they briefly came up
from their lows on a report in The New York Times that House
Speaker John Boehner, according to one House Republican, has
told colleagues that he is determined to prevent a federal
default and is willing to pass a measure through a combination
of Republican and Democratic votes.
Economic data took a back seat to worries about the
political fighting in Washington.
The U.S. Labor Department said jobless claims totaled
308,000 in the week ended Sept. 28, compared with an upwardly
revised 307,000 in the previous week. Economists had projected
the latest figure to have risen to 313,000.
This was the last government economic report until the
partial shutdown ends.
Meanwhile, the Institute for Supply Management index showed
the non-manufacturing sector of the economy grew in September,
but not as quickly as it did in August.
The Fed bought $1.474 billion in Treasuries that mature
between February 2038 and August 2043, part of its intended
planned $45 billion in government debt purchases in October.
Also, San Francisco Fed President John Williams, Atlanta Fed
President Dennis Lockhart, Dallas Fed President Richard Fisher
and Fed Governor Jerome Powell will make public appearances on