| NEW YORK
NEW YORK Oct 11 Fading hopes the United States
will raise the debt ceiling in time to avert a default have
rattled funding markets, as traders now expect Washington might
not reach a deal until the end of the year.
Banks and money market funds have shed U.S. Treasury bills
that mature through the end of the year, briefly sending their
interest rates to the highest since the 2008 global financial
The latest showdown between the President and the
Republicans over the budget has undermined investors' confidence
in Treasury bills, which had been seen almost as good as cash
due to the short maturity backed by the full faith and credit of
the U.S. government.
The fear is that the United States might delay payments on
its debt, as President Barack Obama and Republican lawmakers
have made little progress toward raising the $16.7 trillion debt
limit, which would be exhausted on Oct. 17.
"As the week progressed, you have seen an increase in
volatility," said Jill King, partner and senior portfolio
manager at Horizon Cash Management LLC in Chicago.
Interest rates on the T-bill issue due that day, what
traders dubbed the "drop dead date," traded above
0.50 percent on Thursday, or about 15 basis points above the
yield on a two-year Treasury note. The Oct. 17 T-bill
rate retreated to 0.26 percent on Friday, which was still double
the level a week ago.
Friday's decline was in response to talk the debt ceiling
could be raised through late November - which in turn inspired
selling in issues maturing in December, as those are now seen as
Interest rates on T-bills that mature from Oct 24 through
the end of the year ranged from 0.18 percent to 0.32 percent.
"All the bills that would be at risk will probably continue
to reflect nervousness until we do get the longer term increase
in the debt ceiling," said Ira Jersey, interest rate strategist
at Credit Suisse in New York.
Major money market mutual funds, including Fidelity, J.P.
Morgan and Pimco have shunned T-bills most vulnerable to the
government missing its Oct. 17 debt ceiling deadline.
BlackRock said its money funds have no holdings in T-bills
due in late October through early November.
"We continue to take prudent actions in preparation for all
potential outcomes, despite our belief that Congress and the
President will likely act to prevent a U.S. default," the
world's largest asset manager said in a statement to Reuters.
As the government's short-term borrowing costs have jumped,
borrowing costs for companies, banks and Wall Street have
climbed in the past 72 hours, signaling traders' worries the
Washington impasse over the debt ceiling might drag on much
longer than they had expected just a week ago.
On Wall Street, U.S. stocks rallied sharply on Thursday and
extended gains on Friday on faint signs of progress for a deal.
However, an actual agreement has not yet come to pass, with
negotiations expected to continue through the weekend.
The fight has also resulted in the first government shutdown
in 17 years, which led to the furlough of at least half a
million federal workers and contractors. This development also
knocked U.S. consumer sentiment to a nine-month low, just weeks
before the start of the year-end holiday shopping season.
Concerns over delayed interest and principal payments on
Uncle Sam's debt have spilled over to the $5 trillion repurchase
agreement market where banks and Wall Street firms pledge their
T-bills as collateral to raise cash to fund their daily
"In the repo market there are a lot of people that said they
would like to replace whatever at-risk collateral they can for
other collateral," Credit Suisse's Jersey said.
The overnight interest rates on repos backed by Treasuries
traded to a four-month high near 0.25 percent on Thursday before
easing to 0.19 percent on Friday. A week ago, they were at 0.09
percent. Some of the move on Friday was in anticipation of the
long weekend, as U.S. bond markets are closed on Monday for the
U.S. Columbus Day holiday.
Still, while short-term rates have jumped, they remain very
close to zero and would fall quickly when Washington reaches a
On the other hand, short-term rates might resume their rise
if the President and Republicans remain far apart in raising the
debt ceiling, or produce a very short-term solution that will
result in another fiscal showdown before year-end.
"If this carries into next week and we don't see a
longer-term settlement in raising the debt ceiling, you will see
a lot more volatility," Horizon's King said.