February 4, 2014 / 7:45 PM / 3 years ago

UPDATE 1-Debt ceiling jitters push up U.S. 1-month T-bill cost

3 Min Read

* U.S. pays highest interest on one-month debt since October

* T-bill rate spike harkens to last debt ceiling fight

* One-month bill supply smallest since April 2008

By Richard Leong

NEW YORK, Feb 4 (Reuters) - The U.S. government on Tuesday sold $8 billion in one-month Treasury bills at the highest interest rate since mid-October amid concerns it may not be able to raise its $16.7 trillion borrowing limit by early March.

In a similar scenario less than four months, when the White House and Republican lawmakers fought over raising the debt ceiling, fears of a delay in payment of U.S. debt obligations drove T-bill rates to their highest levels since the global financial crisis.

On Tuesday, the Treasury Department said it would pay dealers and investors 0.13 percent on $8 billion of its debt due on March 6.

This was the highest interest rate it paid on one-month bills since the 0.24 percent on $20 billion in one-month T-bills auctioned on Oct. 16.

"It's all about the debt ceiling," said Gennadiy Goldberg, an interest rate strategist at TD Securities in New York.

Last week, the Treasury paid 0.05 percent on the $10 billion one-month debt. Two weeks earlier, it paid no interest on $12 billion in one-month T-bills

After the mid-October T-bill auction, President Barack Obama and Congress agreed to suspend the federal debt ceiling through the end of this week.

On Monday, Treasury Secretary Jack Lew warned the government could start defaulting on its debt "very soon."

Some money market fund managers had shunned T-bills that will come due in late February through March, analysts said.

The interest rates on these T-bill issues have jumped to the 0.08-0.09 percent area since last week. This compared with 0.04-0.05 percent on T-bills due after late March.

Analysts anticipated a longer-term debt agreement will be reached in a more timely fashion ahead of the latest deadline, rather than the brinkmanship that resulted in only a temporary deal last time.

"We don't think it's going to be a repeat of what we saw in October," said Jennifer Vail, head of fixed-income research at U.S. Bank Wealth Management in Portland, Oregon.

Nevertheless, investors were cautious in bidding for even Tuesday's modest amount of one-month government debt, which was the smallest weekly offering since April 2008.

"Commensurate with the decline in supply for today's auction, demand was relatively weak," Jefferies & Co's money market strategist Thomas Simons wrote in a note on the auction.

U.S. T-bill supply has shrunk since December as the government was on track to scrape against its debt ceiling and faced less short-term borrowing needs due to higher tax receipts.

The U.S. Treasury also pared T-bill issuance to make room for the introduction of two-year floating-rate notes last week.

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