U.S. Short-Term Borrowing Costs Hit '08 Highs

Interest rates on U.S. one-month government debt rose on Tuesday to their highest levels since the global credit crisis in late 2008 as investor anxiety intensified over whether the government would reach a deal to avert a default next week.

One-month Treasury bill rates surpassed levels set during the first debt ceiling showdown between President Barack Obama and top Republican lawmakers more than two years ago.

As its short-term borrowing costs have jumped from near zero just two weeks ago, the U.S. Treasury Department on Tuesday paid investors an interest rate of 0.35 percent at a $30 billion auction of one-month debt. This was the highest rate it paid to sell one-month bills since October 2008.

The rate was 0.02 percentage point below the yield on government two-year notes on the open market.

The five-year high on one-month bill supply did not draw huge interest. The total amount bid relative to the size of the offering came in at 2.75, the lowest since March 2009.

The Treasury was scheduled to auction $30 billion of three-year notes at 1 p.m. (1700 GMT).

Worries over the United States possibly skipping its debt payment obligations after Oct. 17, when the federal government is expected to exhaust its $16.7 trillion statutory debt limit, caused interest rates on the one-month Treasury bill to rise above the rates on one-month loans between banks.

The one-month T-bill rate climbed above the fixing on the one-month London interbank offered rate, known as Libor, for first time in at least 12 years, according to Reuters data.

"The markets now view lending money to the U.S. for one month riskier than lending money to a bank for one month," said Guy LeBas, chief fixed-income strategist with Janney Montgomery Scott in Philadelphia.

The rate on the one-month T-bill due Oct. 31 was last quoted at 0.295 percent after it traded as high as 0.355 percent. This compared with the one-month Libor at 0.1740 percent.

While interest rates on T-bill issues in October to mid-November have jumped on default worries, rates in the second half of November and beyond have stayed in the single-basis-point range.

"This event of the one-month T-bill yields rising above 1-month Libor rates represents a signpost of increased risk rather than a large market move," LeBas said.