U.S. 10-year yield close to 2-month low on fiscal cliff talks

Treasury 10-year note yields traded at almost two-month lows as President Barack Obama meets with lawmakers to resolve the so-called fiscal cliff.

Treasuries headed for a fourth weekly gain, the longest stretch of gains since July. Volatility in Treasuries dropped to a five-year low yesterday. The central bank plans to buy as much as $5.25 billion of Treasuries due from February 2021 to November 2022 today.

“We’re subject to headlines coming out of Washington on this whole process that will inform investor confidence,” said Chris Ahrens, an interest-rate strategist at UBS AG in Stamford, Connecticut, one of the 21 primary dealers that trade with the Federal Reserve. “We don’t know how that’s going to be resolve. There’s more risk that yields will go lower than spike dramatically higher.”

The benchmark 10-year yield was little changed at 1.59 percent at 9:21 a.m. New York time, according to Bloomberg Bond Trader prices. The price of the 1.625 percent security due in November 2022 was at 100 10/32. The yield has declined two basis points this week.

Bank of America Merrill Lynch’s MOVE index, which measures price swings on Treasuries based on options, dropped to 55.6 yesterday, the lowest level since June 2007.

Debt Returns

U.S. government securities were set to outperform corporate bonds on a monthly basis for the first time since May. Treasuries have returned 0.7 percent this month as of yesterday, versus a 0.2 percent loss for company bonds, Bank of America Merrill Lynch indexes show.

U.S. bonds have been supported since President Barack Obama’s re-election on Nov. 6 as investors turned their attention to the fiscal cliff, the $607 billion of tax increases and spending cuts that will automatically come into force at the beginning of 2013 unless lawmakers act.

Yields show inflation expectations are falling.

The difference between yields on 10-year notes and same- maturity Treasury Inflation Protected Securities, a gauge of expectations for consumer prices over the life of the debt, touched 2.34 percentage points today, the least since Sept. 7. The average over the past decade is 2.18 percentage points.