Treasury bond demand most this year on fiscal cliff concern

Treasury 30-year bond yields fell to a two-month low as the U.S. received the highest demand this year at an auction of the debt amid concern lawmakers risk pushing the economy into recession over a budget showdown.

The difference in yields between 10- and 30-year debt narrowed to the least since August with demand for the bonds, as measured by the number of bids submitted compared with the amount of debt sold, the highest since December. Treasuries have risen since the re-election of President Barack Obama and a split Congress on concern they’ll be unable to compromise and avoid a series of automatic tax increases and spending cuts that have become known as the fiscal cliff.

‘The strong auction reflects strong demand,’’ said Priya Misra, head of U.S. rates strategy at Bank of America Corp. in New York, one of the Federal Reserve’s 21 primary dealers that are required to bid on the auction. “If you are worried about the fiscal cliff, the place to be is the long end of the Treasury curve, as the yield there has more room to fall.”

The yield on the current 30-year bond dropped eight basis points, or 0.08 percentage point, to 2.75 percent at 4:14 p.m. New York time, according to Bloomberg Bond Trader data. The price of the 2.75 percent security maturing in August 2042 rose 1 18/32, or $15.63 per $1,000 face value, to 99 31/32. Ten-year note yields fell seven basis points to 1.62 percent.

The U.S. faces $1.2 trillion in mandated spending cuts and tax increases starting Jan. 1 if Congress can’t agree to reduce the deficit, which totaled $1.09 trillion in fiscal 2012. The Congressional Budget Office has said the world’s biggest economy would slow by as much as 0.5 percent next year if Congress fails to prevent the measures from kicking in, pushing the economy over what’s become known as the fiscal cliff.

As Obama was re-elected this week, Republicans maintained control of the House of Representatives and Democrats held on to a Senate majority.

Auction Yield

The 30-year bonds sold today drew a yield of 2.82 percent, compared with a forecast of 2.848 percent in a Bloomberg News survey of nine primary dealers. The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of bonds offered, was 2.77, versus an average of 2.59 for the past 10 sales.

Indirect bidders, an investor class that includes foreign central banks, purchased 45.4 percent of the bonds sold today, compared with 26.5 percent at the October sale, which was the lowest level since August 2011, and an average for the past 10 offerings of 32.6 percent.

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