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Stocks jump, bill prices up as U.S. debt deal close
A visitor walks past logos at the Tokyo Stock Exchange in Tokyo June 13, 2013. REUTERS-Toru Hanai
By Caroline Valetkevitch
NEW YORK | Wed Oct 16, 2013 12:55pm EDT
(Reuters) - World equity markets rose and short-term U.S. Treasury debt rallied on Wednesday as lawmakers neared a last-minute deal to prevent the United States from defaulting on its debt.
U.S. Senate Majority leader Harry Reid said a bipartisan compromise was reached in the Senate to lift the government's $16.7 trillion borrowing limit and re-open the government, which has been shuttered since October 1.
News that a deal had emerged was enough to push U.S. stocks within striking distance of an all-time high. It comes after days of political wrangling over the U.S. budget and the debt limit, which has sparked substantial preparation by dealers in government securities in case of a default.
"Any deal that gets us out of the current box, where we have a potential imminent default, is good," said Cam Albright, director of asset allocation at Wilmington Trust Investment Advisors in Wilmington, Delaware.
Even though final passage may come after the Treasury's Thursday deadline for being able to borrow, it will end up making this back-and-forth similar to the fiscal ceiling debate in 2012, or the extensive preparations to prepare technology systems for the so-called Y2K millennium bug in 2000.
The fixed income market has busied itself with preparations in case of a missed coupon payment, which would reverberate through the short-term repurchase market, a key source of overnight funding for banks and other institutions that depend on the use of Treasury securities as collateral.
That market was effectively shut when Lehman Brothers collapsed in 2008 and endured severe strains in 2011 during the previous debt ceiling crisis.
"People were staying up all night worried about what would happen during (the Y2K) deadline. Then nothing happened," said David Keeble, global head of interest rate strategy with Credit Agricole Corporate & Investment Bank in New York.
"In this case, all the switching out of T-bills and dealings with repos would be for naught if we don't default."
The sharp decline on Wednesday in near-term Treasury bill yields underscored the fluidity of the back-and-forth in Washington. Yields on Treasury bills maturing on October 24 spiked as high as 0.71 percent in the morning before reversing dramatically to yield 0.30 percent - still elevated, but nowhere near as stressed.
However, the difference between bid and offer prices in the short-term rates market and the repo market were elevated, widening to about 10 basis points. They normally trade around a 1-basis-point gap. Activity in the repo market was quiet, according to brokers, because traders were waiting for the outcome of the negotiations in Washington.
The CBOE Volatility index .VIX, Wall Street's fear index, fell 15 percent to 15.87.
The Dow Jones industrial average .DJI was up 183.28 points, or 1.21 percent, at 15,351.29. The Standard & Poor's 500 Index .SPX was up 20.90 points, or 1.23 percent, at 1,718.96. The Nasdaq Composite Index .IXIC was up 43.08 points, or 1.14 percent, at 3,837.09.
MSCI's world equity index .MIWD00000PUS, which tracks shares in 45 countries, was up 0.65 percent, not far from a five-year peak of 391.54 hit on Sept 19.
Worries over whether a resolution will be reached have roiled markets, and late on Tuesday Fitch Ratings warned it could cut the U.S. sovereign rating from AAA, citing the impasse.
If Washington did not reach a deal by Thursday, the U.S. government will by law no longer be able to add to the national debt and will have to rely on incoming revenue and about $30 billion in cash to pay the country's many obligations.
That money is expected to run out quickly and the government would start missing payments in the weeks ahead.
The uncertainty remained apparent in the U.S. debt market, where the cost of insuring one-year U.S. debt against default using credit default swaps recently hit its highest in over two years.
The owners of more than 20 U.S. Treasury securities are seen most at risk as the U.S. Congress struggles to resolve the impasse, with the Federal Reserve almost certainly the largest holder. <id:nl1n0i6024>
Even if a deal is reached, it must still clear the full Senate and possible procedural snags on Wednesday before moving to the fractious House of Representatives, which was unable to produce its own deal on Tuesday.
With a large interest payment due at the end of the month and $58 billion in other obligations coming due the following day, many analysts have circled October 31 as a possible date for default if Congress has still failed to reach an agreement.
The dollar rose against major currencies. The euro was down 0.2 percent against the dollar at $1.3493.
In the Treasury market, benchmark 10-year U.S. Treasuries were up 3/32, their yield at 2.7092 percent.
Gold prices dropped on expectations of a deal in Washington. Spot gold fell 0.6 percent to $1,272.40 an ounce.
U.S. crude oil futures gained more than 1 percent as Congress closed in on a deal. Brent crude futures gained 0.8 percent to $110.88 a barrel, while U.S. crude oil futures gained 1.2 percent to $102.43 a barrel
(Additional reporting by Marc Jones in London; and Richard Leong in New York; Editing by Dan Grebler)
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