September 5, 2017 / 6:27 PM / 10 months ago

UPDATE 1-Investors balk at U.S. T-bill supply on default worries

(Updates with background, quote)

By Richard Leong

NEW YORK, Sept 5 (Reuters) - Investors uneasy about a possible failure to increase the U.S. debt ceiling gave a cold shoulder on Tuesday to $20 billion worth of Treasury debt that will come due when the government might be out of cash if the ceiling is not raised by late September.

The chilly reception to the latest one-month T-bill supply resulted in the Treasury Department paying the highest interest rate on one-month debt obligations in nine years. Its interest rate was higher than the yield on two-year Treasuries on the open market.

The latest one-month auction results were “ghastly,” Jefferies & Co.’s money market strategist Tom Simons wrote in a research note. “The October 5th maturity date for this auction turned off a lot of investors due to debt ceiling concerns.”

Investors were wary about owning this T-bill issue in the absence of a deal among federal lawmakers and the White House to increase the government’s legal borrowing limit, currently at $19.9 trillion.

If the debt ceiling is not raised, the government may opt to reduce operations to avert skipping on its debt payments and a downgrade of its credit rating. Even a partial government shutdown is seen unpopular and may hurt the economy if it is dragged out, analysts said.

Top Republicans and Democrats have signaled the debt ceiling would be increased by Sept. 29 when the Treasury has urged Congress to make such a move.

Without an explicit assurance from lawmakers so far, some investors sat out at Tuesday’s one-month bill sale, analysts said.

The Treasury ended up paying participating investors and dealers an interest rate of 1.300 percent on the latest one-month bill supply, which was the highest rate since 1.575 percent at an one-month T-bill sale on Sept. 9, 2008, Treasury data showed.

On the other hand, the Treasury fetched decent demand for other bill issues on Tuesday: a $25 billion auction of eight-day cash management bills; a $39 billion sale of three-month T-bills and a $33 billion auction of six-month bills. (Reporting by Richard Leong; Editing by Chris Reese and James Dalgleish)

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