LONDON: US 10-year Treasury yields rose near six-week highs in European trading on Friday as the risk of government paralysis and disruption to the federal debt programme grew on a standoff over the budget.
A prolonged government shutdown might force the Treasury to further pare its issuance of Treasury bills in a bid to forestall hitting the current $14.3 trillion federal debt limit.
Higher oil prices and UK producer price data showing input prices rose faster than expected also fueled concern about inflationary pressures, weighing on government debt prices.
"The ongoing (standoff) over the budget is a big negative for Treasuries in the short term. Do I think they will have to come to some kind of solution today? Yes I do," a trader said.
"There's a couple of other things too. Commodities are also on a tear here. Oil is back at $112 and there was particularly horrible producer price data in the UK... I think guys are happy to sell 10-year and 30-year US Treasuries ahead of the auctions next week."
Benchmark 10-year T-notes were down 13/32 in price to yield 3.596 percent, having spiked to 3.609 percent earlier, the highest in almost six weeks. Analysts say a significant break above 3.60 percent could mean a further weakening of bond prices.
The 30-year T-bond price was 18/32 down to yield 4.649 percent while the two-year T-notes were 2/32 lower in price to yield 0.822 percent.
The gap between two-year note yields and 30-year bond yields was little changed from late Thursday levels around 383 basis points, its widest since March 17.
Fewer T-bills could add to the volatility in the US overnight funds market stemming from higher fees on bank liabilities, analysts said.
One-month bills were quoted 1.5 basis points lower on the day at 0.03 percent. They had traded near zero early this week, as investors pulled money from federal funds and repurchase agreements and put it into T-bills in view of the new fee from the Federal Deposit Insurance Corp.
While previous US government shutdowns in the 1980s and early 1990s had little impact on Treasury debt yields, the market may not be so sanguine this time around, Rabobank strategists said. "The stock of US debt has ballooned since the last shutdown at the end of 1995.
Second, sovereign debt risk is clearly currently a global concern," they said in a note.
The failure to avert a shutdown would also raise concern over US politicians' ability to agree on raising the debt ceiling, which is set to be reached by May 16, they added.
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