UPDATE 1-U.S. pays more for one-month bills as debt ceiling showdown looms
NEW YORK, Oct 1 (Reuters) - The U.S. Treasury Department on Tuesday paid the highest interest rate on one-month debt in about 10 months, as many investors shunned Treasuries bills due later this month, when the government is expected to exhaust its borrowing capacity.
The Treasury paid a 0.12 percent to investors to buy its one-month bills, the highest level set at a one-month bill auction since held Nov. 27 last year, when it paid an interest rate of 0.175 percent, according to data from the Treasury Department.
The spike in rates came in the wake of a partial U.S. government shutdown due to political gridlock in Congress over renewing funding for the fiscal year that starts Tuesday.
The government shutdown, the first in 17 years, fuelled worries about a looming fight over raising the federal debt ceiling which is expected to be reached on Oct. 17. Failure to increase the $16.7 trillion statutory borrowing cap could cause the government to default on its debt, according to analysts.
"Bills are one of the best measures of investor anxiety," said Tony Cresenzi, an executive vice president and portfolio manager at Pimco.
In the secondary market the rate on the one-month bills jumped to 0.08 percent, up from 0.02 percent late on Monday, the largest one day jump since July 27 2011, right before the showdown over the debt ceiling cost the United States its triple-A rating from Standard & Poor's.
The yield on the one-month bills was higher than that of three-month and six-month bills, which yielded 0.02 percent and 0.05 percent, respectively, on Tuesday.
Investors have been reluctant to buy Treasury debt that comes due in mid-and late October as these notes are most vulnerable to missed payments if the government does reach a agreement to increase the debt ceiling.
"Oct. 31 bills are seen as being at risk for roll over at the end of the month, so no one wants to be the hero and jump in to buy them," said Ira Jersey, an interest rate strategist at Credit Suisse in New York.
Investors had been flocking to Treasuries bills that are due after October, and are less vulnerable to the government maneuvering, though that demand ebbed on Tuesday as they unwound positions meant to tidy balance sheets for quarter-end, which ended on Monday.
Investors also lent less cash to the New York Federal Reserve in its reverse repo facility on Tuesday, after a dramatic jump on Monday.
The New York Fed said on Tuesday it accepted $4.507 billion in cash from 31 bidders in the facility, down from $58.157 billion from 87 bidders on Monday, the highest figure since the Fed began testing the facility last week.
In reverse repurchase agreements, or reverse repos, the Fed temporarily drains cash from the financial system by borrowing funds overnight from banks, large money market mutual funds and others, and offering them Treasury securities as collateral. Banks and the funds receive a modest overnight interest rate, initially set at 0.01 percentage point, or one basis point.