TREASURIES-U.S. bill rates ease as Senate leaders announce deal
* Senate leaders announce deal to end government shutdown
* Bi-partisan bill must be passed by Senate and House
* Treasury's $20 bln one-month bill sale orderly
* Light demand for Treasury sale of $22 bln in 1-yr bills
NEW YORK, Oct 16 (Reuters) - Interest rates on U.S. Treasury bills that mature in the next two weeks fell on Wednesday as U.S. Senate leaders announced a deal to end a government shutdown.
The bi-partisan bill must still be passed by the Senate and the House of Representatives and signed by the president.
As the $16.7 trillion statutory borrowing limit loomed, investors had hesitated to buy Treasury bills due in the latter half of October in case of a default.
But the prospect of an imminent, albeit temporary, solution to the potential crisis alleviated some of those concerns and helped smooth a path for Treasury sales of short-term debt.
A $20 billion sale of one-month bills proceeded in an orderly fashion, drawing stronger demand than a similar sale last week. Light demand emerged for the Treasury's auction of one-year bills, but Jefferies & Co. money market economist Thomas Simons said the sale was "routine."
Because of their sensitivity to the debt limit, most of the market's volatility was concentrated among bills.
"Never before in my career have I spent so much time looking at the bill curve," said Paul Montaquila, fixed income investment officer with Bank of the West and BNP Paribas Securities Corp. "Bills were trading like tech stocks."
While bill rates rose in early dealings, they later eased amid expectations a deal would get done, Montaquila said.
"Dealers were avoiding the sector and clearing banks were unwilling to finance a paper that matures before year end, causing a fairly chaotic environment. But new hopes for a deal reversed those trends and short T-bill rates fell in anticipation of a deal," said Thomas di Galoma, co-head of fixed income rates at ED&F Man Capital.
The impact of the unresolved debt ceiling issue was felt early in the repo market as well, where the general collateral repo rate briefly rose to the highest level since last year.
The prospect of a deal encouraged markets, but analysts also called it a temporary solution that laid the groundwork for another potential showdown early next year.
Weeks of bitter fighting among Democrats and Republicans over President Barack Obama's signature healthcare reform law led to a two-week government shutdown, sidelining hundreds of thousands of federal workers.
The initial fight over the healthcare law turned into a bigger battle over the debt ceiling, threatening a default that would likely have reverberated around the world.
On Wall Street, the stock market rallied on news of a deal that would extend U.S. borrowing authority until Feb. 7 and fund government agencies until Jan. 15, ending the partial government shutdown that began on October 1.
Uncertainty over Washington's ability to avert a default led Fitch Ratings to warn on Tuesday that it could cut the sovereign credit rating of the United States from AAA, citing the political brinkmanship over raising the federal debt ceiling.
"We have no real economic numbers to trade off of, and traders and investors are glued to their TVs, watching and waiting for some good news," said Kevin Giddis, head of fixed income capital markets at Raymond James.
The Federal Reserve will release its Beige Book, an anecdotal narrative describing business conditions throughout the nation, at 2 p.m. EDT (1800 GMT).
But Montaquila said the market would likely treat the report as "an afterthought, with everything that has gone on."
Benchmark 10-year Treasury notes rallied modestly on news that a deal was nearing.
Down 5/32 in price earlier in the session, they rose to show a gain of 6/32 on the day. Their yields eased to 2.71 percent from 2.73 percent late on Tuesday.
Interest rates on T-bills due on Oct. 24 and Oct. 31 rose in early dealings, but then eased on the likelihood that a feared default had been avoided.
The yield on a two-year Treasury note that matures at the end of October and was issued in 2011 last stood at 0.6611, down from 0.7640 percent earlier in the session.
The Federal Reserve Bank of New York bought $1.464 billion in Treasury coupons with maturities ranging from February 2036 through August 2043 as part of the Fed's large-scale purchases aimed at stimulating the economy and lowering unemployment. The