By Ben Eisen NEW YORK (MarketWatch) — Treasury prices edged down Tuesday ahead of an auction of 3-year notes but held to the relatively tight trading range that has characterized a broader fiscal policy standoff since the federal government’s partial shutdown last week. The markets are expecting lawmakers to reach an agreement on a spending bill and debt-ceiling hike before the October 17 time-frame for the U.S. running up against its borrowing limit. But a debt-ceiling deal with no strings attached is looking less likely this week, according to news reports. Olivier Blanchard of the International Monetary Fund said a U.S. failure to raise the debt ceiling would be a “major event�. Treasurys have shown little fear over the potential for a technical default that would result in payment delays on certain Treasurys. But one sign investors are getting nervous is a spike higher in one-month Treasury bill 1_MONTH +43.83% yields, whose maturities come soon after the debt-ceiling deadline, making them most at risk of default. The yield on the 1-month security maturing on October 24, which moves inversely to price, climbed as high as 0.233%, up from 0.028% on September 30, according to Tradeweb. The Treasury will auction $30 billion of 1-month notes at 11:30 a.m. Eastern. The longer end of the yield curve has shown a more muted reaction to the fiscal fighting. The benchmark 10-year note 10_YEAR +0.30% yield rose 1.5 basis points to 2.645% while the 30-year bond 30_YEAR +0.35% yield rose 1 basis point to 3.705%. The 3-year note 3_YEAR +2.00% yield rose 1.5 basis points to 0.660% ahead of a sale of $30 billion worth of the debt. Investors’ shrinking appetite for risk may help provide support for the safety of Treasurys during the auction, but uncertainty over the debt ceiling could keep others out of the market. “The much bigger question this time around is whether the lack of fiscal clarity keeps investors on the sidelines or has shaken foreign buyers’ confidence in USTs,� said Stanley Sun, strategist at Nomura Securities, in a note. The Federal Reserve decided not to scale back its easy money policies during its meeting last month, giving a boost to the bond market, which benefited from its $85 billion in monthly bond-buying, meant to help stimulate the economy. That lack of action, which many say could be pushed back to next year given fiscal policy concerns, has moved the central bank’s outlook to the back-burner for now. The Fed has said any monetary policy change will be based on data, but the partial government shutdown has delayed much of the data this month, including last Friday’s nonfarm payrolls report and Tuesday’s trade balance data.

Source