Treasuries outlook: debt ceiling fears move out to late November-December bills

Yields on Treasuries bills maturing in late November and December jumped on Friday, as investors worried that any deal to increase the US debt ceiling would kick the risks of a default down the road. Gains in longer-dated maturities faded as the market quieted before the three-day Columbus Day weekend.
Some of that fade-out was due to efforts by President Barack Obama and congressional Republican leaders to allow a short-term reopening of the federal government and an increase in the US debt limit. "The Treasury market is in this tight trading range," said Daniel Heckman, senior fixed income strategist at US Bank Wealth Management in Kansas City, Missouri.
The risk that US elected officials might not come to an agreement on the government shutdown and raising the federal debt ceiling this weekend makes people hesitate to sell Treasuries, he said. Supportive for the Treasury market is that this week's three Treasury auctions are completed, Heckman added. The Treasury's sales of three-, 10- and 30-year debt this week drew solid demand. "The reality is large foreign and institutional investors realise the US government would make good on its obligations even with the risk of this default and that - fundamentally - things aren't that bad," Heckman said. "We're going to find that longer-term, irreversible damage wasn't done to the economy," he said. "People will look over this valley; we won't always have to be addressing this issue."
Yields on short-term Treasuries bills have surged this week as banks, money funds and others avoid debt that matures or has coupon payments coming due in the danger zone, when the United States is expected to run out of funds if the debt ceiling is not lifted.
On Friday, those concerns were increasingly pushed out to Treasuries bills that mature in late November and in December, when the debt ceiling will again be an issue if the government agrees to postpone the debt ceiling issue by six weeks. Yields on Treasuries bills maturing on November 29 jumped to 0.18 percent on Friday, up from 0.12 percent late on Thursday and 0.05 percent on Wednesday.
Yields on one-month Treasuries bills that come due on November 7 traded at 0.26 percent, unchanged from 0.26 percent late on Thursday. They remain significantly higher than at the start of the month, before concerns about a default rose, when they yielded only around 0.02 percent. The debt came under pressure even though most investors still expect a default by the US government is unlikely.
"The stress in some of the bills is a case of a little bit of window-dressing by money market funds and others," said Jim Kochan, chief fixed income strategist at Wells Fargo Funds Management in Menomonee Falls, Wisconsin. "The officials at those funds may not be expecting a default, but they need to take precautions because if there is one, there would be no defence for not having prepared for it."
The cost to obtain overnight loans backed by Treasuries in the repurchase agreement market also rose to around 0.20 percent on Friday, as investors became wary of accepting affected collateral to back loans. The repo rate had traded at around 10 basis points until this week, when it jumped in highly volatile trading on concerns over the debt ceiling. At the longer end of the yield curve, benchmark 10-year notes were last down 1/32 in price, yielding 2.69 percent. Thirty-year bonds were down 10/32 in price to yield 3.75 percent.