Wed Oct 16, 2013 5:37pm EDT

* Senate leaders announce fiscal agreement has been reached
    * Wall Street stocks end up more than 1 pct, global stock
index climbs
    * U.S. dollar up against yen


    By Caroline Valetkevitch
    NEW YORK, Oct 16 (Reuters) - Global equity markets rose
while yields on short-term U.S. Treasury debt fell from 5-year
highs on Wednesday as U.S. Senate leaders announced a deal to
prevent the United States from defaulting on its debt and end
the government shutdown.
    U.S. Senate Majority Leader Harry Reid and Senate Republican
leader Mitch McConnell said leaders had come to an agreement,
which will reopen the government that has been shut since Oct.
1, and raise the debt ceiling until February. The House of
Representatives planned to vote on the measure later in the day.
 
    The final passage may come after the Treasury's Thursday
deadline for being able to borrow, but news that a deal had
emerged was enough to soothe markets, which have been roiled by
the Washington impasse. U.S. stocks shot up more than 1 percent,
putting the S&P 500 just below its all-time closing high.
    "It looks like we'll get through this, which brings the
(stock) market a bit of a reprieve. Not only is this a relief
rally, but we're still in an environment with a very
accommodative monetary policy, which provides a tailwind," said
Judy Moses, portfolio manager at Evercore Wealth Management in
San Francisco.
    Days of political wrangling over the U.S. budget and the
debt limit also sparked substantial preparation by dealers in
government securities for the possibility of a default.
    A missed coupon payment would reverberate through the
short-term repurchase market, a key source of overnight funding
for banks and other institutions that depend on the use of
Treasury securities as collateral. 
    That market was effectively shut when Lehman Brothers
collapsed in 2008 and endured severe strains in 2011 during the
previous debt ceiling crisis. 
    Some have compared the situation to the extensive
preparations to prepare technology systems for the so-called Y2K
millennium bug in 2000, as well as to the fiscal ceiling debate
in 2012.   
    "People were staying up all night worried about what would
happen during (the Y2K) deadline. Then nothing happened," said
David Keeble, global head of interest rate strategy with Credit
Agricole Corporate & Investment Bank in New York.      
    "In this case, all the switching out of T-bills and dealings
with repos would be for naught if we don't default."
    The situation also resulted in much volatility in the
near-term Treasury bill market, which is more sensitive to the
debt limit.
    Yields on Treasury bills that come due later this month fell
on reports of a deal, after skyrocketing in the morning.
Interest rates of bills that come due in February rose, however,
as issues over the debt ceiling again look likely to be raised
in that month.
    Debate over the debt ceiling and reduced activity from the
partial government shutdown are seen as harming the economy just
as the Federal Reserve is likely to begin paring back its $85
billion-a-month bond purchase program.
    Yields on bills due on Oct. 24 fell to 0.26
percent in highly volatile trading, after getting as high as
0.72 percent earlier on Wednesday. Rates on Treasury bills
maturing on Feb. 13 rose by as much as 0.14 percent
on Wednesday, up from 0.05 percent on Friday.   
    Also, the gaps between bid and offer prices in the
short-term rates market and the repo market increased, widening
to about 10 basis points. They normally trade around a
1-basis-point gap. Activity in the repo market was quiet,
according to brokers, because traders were waiting for the
outcome of the negotiations in Washington.
    On Wall Street, the Dow Jones industrial average was
up 205.82 points, or 1.36 percent, at 15,373.83. The Standard &
Poor's 500 Index was up 23.48 points, or 1.38 percent, at
1,721.54. The Nasdaq Composite Index was up 45.42
points, or 1.20 percent, at 3,839.43.
    The CBOE Volatility index, Wall Street's fear index,
fell 21 percent to 14.71 in its biggest one-day decline since
August 2011. 
    MSCI's world equity index, which tracks
shares in 45 countries, was up 0.7 percent at 389.82, not far
from a five-year peak of 391.54 hit on Sept 19.
    Even though the consensus view among investors had been that
a deal would eventually be reached, investors have had reason to
worry.
    The owners of more than 20 U.S. Treasury securities were
seen most at risk, with the Fed almost certainly the largest
holder. For a factbox, see 
    Citing the debt ceiling impasse, Fitch Ratings late on
Tuesday warned it could cut the U.S. sovereign rating from AAA.
    Without a deal on the debt issue, the U.S. government would
by law no longer be able to add to the national debt and would
have to rely on incoming revenue and about $30 billion in cash
to pay the country's many obligations. 
    That money would run out quickly and the government would
start missing payments in the weeks ahead. 
    
    DEAL TALK ALSO BOOSTS U.S. DOLLAR, OIL     
    The dollar rose against most currencies after the
announcement in Washington. The dollar was up 0.7 percent
against the yen at 98.81. It hit a high of 98.97, the
highest since Sept 27. The dollar index was flat on the day at
80.507 <.DXY, peaking at 80.754, the highest since Sept 18.
    Oil prices also rose on the deal talk. Brent crude futures
 gained 90 cents to settle at $110.86 a barrel, while
U.S. crude oil futures gained $1.08 to $102.29.
     Gold prices edged lower after the news, though losses were
limited as physical buying in Asia and the United States
emerged. Spot gold was down 60 cents, or 0.05 percent at
$1,279.64 an ounce.