NEW YORK - Government bond prices fell slightly Wednesday as lawmakers fought along party lines over raising the country's borrowing limit. The continuing impasse and unyielding positions on both sides has brought the country closer to an Aug 2 deadline to raise the limit or risk an unprecedented default on US government debt. The government auctioned $35 billion of five-year notes Wednesday at a yield of 1.58 per cent, slightly higher than expected. Demand was moderate. Investors placed bids for 2.62 times the amount of notes up for sale, lower than the 2.73 average over the past four auctions. A lower rating for US government bonds or a default would cause interest rates to rise.
But the markets are signalling that Treasury yields are safe for now, and no one's bailing out of US debt yet. That's because traders believe that a default will lead to so much turmoil in the global markets that there will be a rush to purchase US bonds. Worries about the debt impasse roiled the stock markets Wednesday. The Dow Jones industrial average fell 198.75 points, or 1.7 per cent, to 12,302.55, its biggest one-day drop since early June. The price of the ten-year Treasury note fell 21.8 cents for every US$100 invested. Its yield rose to 2.97 per cent from 2.95 per cent Tuesday. The price of the 30-year Treasury fell 9.3 cents. Its yield rose slightly to 4.29 per cent from 4.28 per cent late Tuesday. In the market for short-term Treasury bills, the three month T-bill paid a 0.07 per cent yield. Its discount was 0.08 per cent.