U.S. 10-year yield falls to 2-month low on fiscal-cliff concern

Treasuries rose, with 10-year yields reaching a two-month low, amid speculation U.S. lawmakers face headwinds to agree on measures to avoid the so-called fiscal cliff.

Benchmark yields headed for their biggest weekly drop since August as President Barack Obama’s re-election this week against Republican challenger Mitt Romney fueled bets the Federal Reserve will maintain bond purchases, known as quantitative easing. The fiscal cliff refers to more than $600 billion of tax increases and spending cuts scheduled to take effect automatically next year unless Congress acts. The difference between the yield on the two-year note and the 10-year security narrowed to the least in two months.

“The market feels that it’s not going to get resolved this year,” said Thomas di Galoma, a managing director at Navigate Advisors LLC, a brokerage for institutional investors in Stamford, Connecticut. “The general sentiment is that we’re probably going to see more muddling through on the economy and we’re probably going to see more QE in the next two to three years. That’s propelling bond prices higher.”

The 10-year yield dropped two basis points, or 0.02 percentage point, to 1.59 percent at 9 a.m. in New York, according to Bloomberg Bond Trader prices. The 1.625 percent note due in November 2022 rose 7/32, or $2.19 per $1,000 face amount, to 100 10/32. The yield earlier dropped to 1.578 percent, the lowest level since Sept. 5.

The yield has declined 12 basis points this week, the most since the period ended Aug. 31.

Expensive Debt

U.S. government securities traded at the most expensive levels in five weeks. The 10-year term premium, a model created by economists at the Federal Reserve that includes expectations for interest rates, growth and inflation, was negative 0.94 percent, the most costly since Oct. 3. A negative reading indicates investors are willing to accept yields below what’s considered fair value. The average this year is negative 0.76 percent.

The difference between the yields on two-year and 10-year notes, the so-called yield curve, narrowed to 132 basis points, the least since Sept. 5. Historically, a so-called flatter yield curve reflects higher demand from investors anticipating slower economic growth and inflation.

The Thomson Reuters/University of Michigan consumer sentiment index climbed to 82.9 this month from 82.6 in October, according to economists surveyed by Bloomberg before a preliminary reading of the gauge today. That would be the highest since September 2007.

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