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Default jitters spread to U.S. repo market

By Richard Leong

NEW YORK (Reuters) - Growing worries about a possible U.S. default are spreading to a key part of the short-term credit market, sending overnight interest rates to their highest in five months on Wednesday.

Following the recent jump in interest rates on U.S. Treasury bills, banks and Wall Street firms are paying more to borrow in the repurchase agreement market, where they often pledge Treasuries as collateral in exchange for short-term cash to finance trades and loans.

Traders said some money funds and banks are starting to refuse to accept Treasury securities maturing in the next several weeks as repo collateral.

"Investors are worried about holding Treasury bills and coupon securities in late October through the middle of November, which may face delayed payments," said Boris Rjavinski, rates and rate derivatives strategist at UBS in Stamford, Connecticut.

Optimism is fading the White House and Congress can agree on a deal before October 17 when the government is expected to exhaust its $16.7 trillion statutory debt limit, but traders are clinging to hopes of a last-minute pact to avert a default, which traders fear would be catastrophic for the global economy.

In the $5 trillion repo market, the overnight rate to obtain cash was last quoted at 0.14 percent after rising as high as 0.17 percent earlier, which was a level not seen since early May. This compared with 0.09 percent on Tuesday and 0.07 percent a week earlier.

Treasury bill rates continue their dramatic increase.

The interest rate on the T-bill issue due Oct 17 rose 17.5 basis points to near 0.46 percent, which was a level not seen since the height of 2008 global financial crisis.

T-bill rates on T-bills that mature after November 14, however, have remained in the single basis-point range, suggesting traders anticipate any disruption in debt payments will likely be brief.

"Those (default) fears are overblown, but clearly some people are concerned," Rjavinski said.

(Reporting by Richard Leong; Editing by Chizu Nomiyama)

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