TREASURIES-U.S. Oct bill rates jump as debt clock runs down
* Default fears lift October T-bill rates near 5-year highs
* U.S. lawmakers edge closer on deal to raise debt ceiling
* Longer-dated bond prices fall on hopes of fiscal stability
NEW YORK, Oct 15 (Reuters) - Interest rates on U.S. Treasury bills that mature in the next two weeks jumped on Wednesday on fears the government will delay payments on them, even as as lawmakers hinted that there could be a deal to raise the debt ceiling before a Thursday deadline.
Until the $16.7 trillion statutory borrowing limit is actually increased, few investors are going to buy Treasury bills that come due in the latter half of October because of the possibility of a "technical default," analysts and traders said.
"It has not calmed down in the front-end bill market yet. No one feels confident about a deal yet," said Mary Beth Fisher, head of U.S. interest rates strategy at SG Corporate & Investment Banking in New York.
Interest rates on T-bills due on Oct. 24 and Oct. 31 swung wildly . They surged above 0.50 percent in late trading, up 30 basis points from late on Friday. The rates fell 10 basis points earlier on Tuesday on hopes that a debt ceiling agreement would be reached to avert a default.
The yield on a two-year Treasury note that matures at the end of October and was issued in 2011 jumped in sympathy with its October T-bill counterparts. Its yield last traded at 0.7297 percent, up 21 basis points from Friday.
The U.S. bond market was closed on Monday for the Columbus Day holiday.
Senate leaders were close to a deal that would reopen the government, which has been partially shut for two weeks, and raise the debt limit until early 2014, while an alternative plan proposed by House Republican leaders failed to gain enough support in a closed-door meeting for the House to proceed.
These proposed fixes on the debt ceiling and a possible end to the first government shutdown in 17 years rekindled some appetite for T-bills that mature in the second half of November to the end of the year, but T-bill rates in early 2014 rose on worries about another showdown between the White House and Republican lawmakers over the budget and the debt ceiling.
"They haven't taken out the default risk. They are just being repriced further out," SG's Fisher said.
Delayed payments on Treasuries, traders fear, could unleash chaos on financial markets where Treasuries are used as collateral for many types of loans and benchmarks for other interest rates. Even if the delay on Treasuries interest and principal payments is brief, the aftermath could be a headache for traders and investors.
"Operationally, it's going to be a mess to clear it up," said Bret Barker, portfolio manager at TCW in Los Angeles.
LOUSY T-BILL AUCTIONS
On Tuesday, the U.S. Treasury Department sold $35 billion worth of three-month bills and $30 billion worth of six-month bills at the weakest bids seen since 2009.
The Treasury will sell $68 billion in T-bills on Wednesday: $20 billion in one-month bills ; $26 billion in 189-day cash management bills and $22 billion in one-year bills .
Longer-dated Treasuries prices fell, signaling fewer safehaven bids on hopes of some longer-term fiscal stability, 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.
Benchmark 10-year Treasury notes fell 9/32 in price for a yield of 2.726 percent, up 3.5 basis points from late on Friday.
The 30-year bond shed 22/32 to yield 3.785 percent, up about 4 basis points from Friday.