October 15, 2013 / 5:13 PM / in 4 years

TREASURIES-Bonds fall as market tunes into debt ceiling play-by-play

* Rates rise on short-term Treasury bills

* Focus on efforts to open government, lift U.S. debt ceiling

* Brief selloff in Treasuries expected if debt ceiling deal is reached

By Ellen Freilich

NEW YORK, Oct 15 (Reuters) - U.S. Treasuries prices slipped and short-term bill rates rose on Tuesday as traders tried to follow Washington’s every move to re-open the government and raise the U.S. debt ceiling.

Trading was choppy, with rates on Treasury bills maturing soon after October 17 the most sensitive to the back and forth in Washington as elected officials tried to agree on raising the U.S. debt ceiling and reversing the partial government shutdown, the first in 17 years.

At first, interest rates on U.S. Treasury bills at the shortest end of the maturity curve eased amid hints of a possible agreement in Washington. But as renewed doubt overshadowed that bit of optimism, short-term bill rates rose.

Earlier, Treasury rates on T-bill issues due in October to November had fallen to their lowest level in a week, although they remained elevated compared with three weeks ago.

Even though the securities sold would not mature for another three- and six months, the Treasury’s weekly auctions of three- and six-month bills on Tuesday drew demand that was “way below the average over the past few months” with the value of bids received over those accepted the lowest since 2009, said Stone & McCarthy Research Associates analyst Cathy Guo.

Bumping up against a potential default if the debt ceiling is not raised, the U.S. Treasury said it would sell $26 billion in 189-day cash management bills and $20 billion in four-week bills on October 16, with both issues settling on Oct. 17.

U.S. senators expressed hope that a bipartisan deal could emerge on Tuesday to end Washington’s fiscal crisis but Republicans in the House of Representatives said they were working on a separate plan that includes measures that would affect President Barack Obama’s healthcare reforms.

Thursday is the deadline by which the Obama administration says the U.S. will reach its borrowing limit and risk default.

The one-month Treasury bills due on Nov. 7 are the most sensitive to efforts to raise that statutory $16.7 trillion borrowing limit, on track to be exhausted on Thursday.

Rates on those short-term bills rise when a settlement of the potential crises looks in doubt and ease on hints that a resolution is nearer at hand.

The T-bill issue due on Nov. 7 last traded at 0.21 percent.

“The bill market is at the eye of the storm in terms of the technical implications of even a one- or two-day or one-week default. That’s why you’re seeing gyrations in the bill market,” said Wilmer Stith, co-manager of the Wilmington Broad Market Bond Fund in Baltimore.

“In the two- to 30-year part of the curve, yields rise when it seems there’s a greater probability of extending the debt ceiling and reopening the government,” he said.

When a resolution to those issues seems to recede “all of a sudden you’ll see buyers appear and a flight to quality in the five- to seven-year part of the curve,” Stith said.

That part of the curve, the “belly” as it’s often dubbed in market parlance, “gets beat up the most or outperforms the most because it’s where a lot of the tension is located related to the question of when the Federal Reserve will begin to taper,” he said, referring to the junction at which the U.S. central bank could start to trim the $85 billion a month in purchases of Treasuries and mortgage-backed securities it has been making to try to stimulate the economy.

Stith said if an agreement is reached, the bond market might experience a brief sell-off. But at the end of that, yields will tend to ease again.

Several factors argue for lower rates. One is that an agreement could be temporary, meaning that “we’ll be back to this conflict several months from now,” Stith said.

“This means there is going to be continued political uncertainty for the Fed to be dealing with as well as a vacuum of economic data,” he said.

Government data releases on the state of the U.S. economy have come to a halt during the partial government shutdown.

“Even without having the data in hand, however, it’s clear the economy is performing less well than it would be without this consternation in D.C.,” Stith said.

These factors argue for lower rates, though the prospect of the Fed trimming its purchases 2014 will make bond market participants cautious about driving yields too low, he said.

On Tuesday, the Fed bought $5.208 billion in Treasuries with maturities ranging from July 31, 2018 to June 30, 2019.

News from the Federal Reserve Bank of New York that factory activity in New York State grew in October at its most anemic pace since May had no discernible market impact.

The Empire State index “is an independently surveyed sentiment gauge, not constructed from components, and was probably impacted by early reactions to the Washington confrontation,” said Pierre Ellis, senior economist at Decision Economics in New York.

The market opened for the first session of the week after being closed on Monday for the Columbus Day holiday.

At the longer end of the yield curve, benchmark 10-year notes were last down 8/32, their yields rising to 2.72 percent from 2.695 percent late on Friday.

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