Investors sold US Treasuries on Monday after talks in Washington to cut the US deficit and raise the legal borrowing limit fell apart and Democrats and Republicans set to work on separate plans. The impasse boosted fear no legislation would be passed in time to avoid a default on US debt. Federal funding options will run out in nine days.
Both Democrats and Republicans are working on plans to cut spending by more than $1 trillion without raising taxes but US President Barack Obama said spending cuts alone were not enough to solve the deficit problem. Following the release of Democratic deficit-reduction plan, the White House endorsed the plan put forward by Senate Democratic leader Harry Reid, saying it would remove the cloud of a possible default through 2012.
Treasury prices fell, with the 30-year bond losing more than a point in price, but volume was below average, according to data released by ICAP. "Where negotiations stand at this point, it's going to be the 11th hour before they get anything done," said Mary Ann Hurley, vice president of fixed income trading at D.A. Davidson in Seattle. "I am in that camp that I think that they will, because the ramifications of them not getting it done are so humongous that it's hard for me to believe our leaders can be that short sighted, to not have an agreement."
Monday's selling was most intense among longer-dated maturities, which signal escalating fears of a US default and the possible loss of the United States' AAA debt rating. The 30-year Treasury bond was last down 1-2/32 in price for a yield of 4.32 percent versus Friday's close of 4.26 percent. It had traded down as much as 1-14/32, touching a session high yield of 4.35 percent.
Benchmark 10-year notes were down 10/32 with a yield of 3 percent, up from 2.97 percent late Friday. Two-year Treasuries were off 1/32 and yielding 0.42 percent. Many investors are clinging to the hope that the two major US political parties will reach a compromise to increase the borrowing ceiling - the major hurdle to raising the debt limit - and allow the world's largest economy to avert a default.
In the credit default swap market, the cost to insure against a US default rose to the highest since February 2010, with the five-year CDS price up 57 basis points. Investors fear a US default could send US interest rates soaring and prompt a vicious sell-off in stocks and other risky assets, which would hurt an already fragile economy. The US Treasury plans to sell $99 billion in coupon-bearing debt this week, starting with a $35 billion auction of two-year notes on Tuesday.