Short-term funding rise on US debt ceiling impasse

NEW YORK: Nervousness over whether the US Treasury will be able to meet debt obligations in August increased on Thursday, and investors were closely watching to see if the Treasury will unveil a plan over how it may prioritize payments.

Rates on Treasury bills maturing on Aug.4, two days after the Treasury has warned it may run out of cash, rose to around 18 basis points, up from 12 basis points on Wednesday and from around zero as little as two weeks ago.

The cost of borrowing in the repo market also rose as investors grew increasingly reluctant to hold Treasury securities, instead preferring cash.

"Some people are worried about haircuts going up, and that the cost of doing business in the repo market funding will be higher," said Richard Gilhooly, interest rate strategist at TD Securities in New York.

Borrowing rates with for using overnight collateral in the repo market jumped to 14 basis points on Thursday. They had traded at around 10 basis points on Wednesday, a dramatic jump from the previous several weeks where they had traded near zero.

An increase in repo "haircuts", or the amount of Treasuries that need to be pledged to back borrowing as collateral, could have broad repercussions across financial markets as it would cause investors to reduce their leverage, in effect reducing the amount of cash available for investment.

"Maybe you had some leveraged guys taking off positions just in case that happened," Gilhooly said.

The rise in repo rates also reflects money market funds cutting back on repo lending, instead preferring to hold cash, he said.

"They don't want to be tied in up in repo arrangements if they can't get their money back, or if there is a default," he said.

With lawmakers still at an impasse over how to raise the debt ceiling, many investors were seeking greater clarity over how the Treasury may prioritize payments

Treasury officials said on Wednesday they will lay out a plan in the next few days if it appears that Congress will miss its Aug. 2 deadline.

The US commercial paper market also shrank for a second week, dropping by $2.8 billion to $1.205 trillion outstanding in the week ended July 27, as investors reduced their appetite for short-term corporate debt due to worries about the US debt ceiling, Federal Reserve data showed on Thursday.

Benchmark three-month dollar Libor rates also rose to their highest level since May, reaching 0.25395 percent, up from 0.25285 percent on Wednesday.

Copyright Reuters, 2011