Investors hasten exit from US Treasury bills amid default fears The exit from US Treasuries accelerated on Tuesday, as concerns mounted about financial market turmoil should a failure to raise the debt ceiling result in a delayed payment later this month. Treasury bills maturing later this month and in early November rose above 30 basis points on Tuesday, their highest level since late 2008 when the Federal Reserve adopted a zero interest rate policy and anchored short-term interest rates. These yields are up from about zero per cent since mid-September. In turn, the general collateral rate used for financing short-term lending between banks and investors in the repurchase, or repo, market jumped to 25bp and is up from 8bp a week ago. Short-term Treasury bills are a critical element of the financial system and their "risk free" status means they are widely used by banks and investors as an alternative to cash deposits, and to also support derivatives trading. As such the bills play an important role in the plumbing of markets, facilitating orderly trading conditions. As Washington delays raising the $16.7tn federal debt ceiling and the US Treasury has warned it will run out of money later this month, however, the first sign of stress is emerging in the key funding markets that underpin the financial system. The aversion to owning Treasury bills that extend into November, with yields for maturing securities also climbing higher, is a sign that investors fear that a protracted battle in Washington will force the US Treasury to delay making a debt payment. Jack Lew, US Treasury secretary, has warned that his department could exhaust its resources by October 17, making it unable to pay interest and coupons on its bonds without Congress approving an increase in its borrowing limits. "The longer this goes on, the more likely we see people leave the bill market and repo that mature in late October," said Joseph Abate, money market strategist at Barclays. People are unwilling to bid for term repo that goes over October 31. My sense is that there will be a migration to bank deposits. Wrightson Icap estimates $120bn of bills mature on October 17, followed by $93bn maturing on October 24 and $89bn maturing on October 31. The various maturing bills include four-week, 13-week, 26-week and 52-week securities. While investors expect they will be paid by the US Treasury eventually - and cite a prior episode in 1979 when a maturing bill payment was delayed for a few days - the uncertainty about how the government and the market will handle the delayed payments may nevertheless prompt them to sell securities in the short term. "History suggest that the US government will ultimately compensate investors for payment delays," said Steven Major, strategist at HSBC. "Already, the debt markets are distinguishing between issues that might face payment delays and those that are unlikely to," such as longer-term Treasuries, he said. On Tuesday, the Treasury sold new one-month bills at a yield of 35bp - almost three times the 12bp yield on offer in last week's auction of the four-week debt. Demand for the bills also dropped sharply, with the ratio of investors" bids to the amount of debt available falling to 2.75.