Big banks plan for missed US payment Big banks and investors are making contingency plans to deal with the potential impact on the $5tn "repo market" of the US government missing a payment on its debt. The repo market is a crucial financing area for banks, who post their holdings of Treasury securities as collateral for short-term loans from money market funds, insurers and other investors. With the status of short-term Treasury bills being called into question because of the debt ceiling deadlock in Washington, banks are being forced to use US securities that mature after mid-November as collateral. One senior banker said that three large repo lenders had asked his company, a big US investment bank, to start thinking about how it would amend the agreements for its tri-party repo deals to explicitly exclude shorter-term Treasury securities that are viewed as most vulnerable to the gridlock in Washington. "It's a recalibration," the banker said. We're definitely seeing some pretty big investors looking to exclude these maturities. About $120bn worth of US government debt is scheduled to mature on October 17, the day the US Treasury department has said it will run out of resources to repay its bonds. Another $93bn is due to mature on October 24 and $89bn on October 31. Rates for repo deals over the next month were quoted at 24 basis points late on Wednesday, up from less than 10 bps in the past week as funding pressures have intensified. Investors have continued to sell T-bills, sending the yield on the one-month security maturing on October 17 to 48 bps late on Wednesday. In September the yield was below zero as investors clamoured for the short-term security. While many repo investors say the risk of a US default is extremely low, concerns over the debt ceiling are depriving short-dated T-bills of their status as highly liquid and safe assets. Fidelity Investments, the largest manager of money market funds, revealed on Monday that it had sold all of its holdings of US Treasury bills due to mature towards the end of October as a "precautionary measure." "Investor nervousness in the front end is largely driven more by fears related to a loss of liquidity than a loss of principal," said Joseph Abate at Barclays. And because the sector places extreme importance on maintaining liquidity, investors have a strong incentive to step away from transactions or securities that could, even peripherally, be affected by a delay in increasing the debt ceiling. Sifma, the financial industry body, says it has put in place a plan to smooth the functioning of the repo market in the event of a missed payment on US debt. It involves adding an extra number to the bonds" "CUSIP" number in order to keep them circulating in the financial system until the US Treasury can make a payment. "Treasuries set the baseline risk-free rate for global rate markets and command a vital role as collateral in repurchase agreements," Deutsche Bank analysts said in a note to clients. Because of this far-reaching scope, it is extremely difficult to accurately quantify the impact of a Treasury default on markets and the global economy.