Treasuries erase losses as Boehner says no deficit plan progress

Treasuries erased losses after Republican House Speaker John Boehner said “no substantive progress” has been made in talks to avert the so-called fiscal cliff, boosting demand for haven assets.

Government debt fell earlier today on speculation lawmakers were making progress in budget talks to avoid automatic spending cuts and tax increases. The Treasury will sell $29 billion of seven-year notes today after demand rose at an auction of five- year debt yesterday. The Federal Reserve is acquiring as much as $17.2 billion in six Treasury purchases this week, including a purchase of $4.74 billion today.

“The market is focused on utterances from people in Congress on one side of this debate or the other,” said Ray Remy, head of fixed income in New York at Daiwa Capital Markets America Inc., one of 21 primary dealers that trade directly with the Fed. “Boehner tempered those statements by saying he will do everything to not go over the cliff.”

The yield on the benchmark 10-year note dropped one basis point, or 0.01 percentage point, to 1.62 percent at 12:01 p.m. in New York, according to Bloomberg Bond Trader prices. The 1.625 percent note due in November 2022 added 3/32, or 94 cents per $1,000 face amount, to 100 2/32. The yield reached 1.64 percent earlier today. It dropped to 1.60 percent yesterday, the lowest since Nov. 19.

Debt Returns

Treasuries have returned 2.7 percent this year, after gaining 9.8 percent in 2011, according to Bank of America Merrill Lynch indexes. The securities returned 0.6 percent this month, according to the indexes.

The difference between the yields on two and 10-year notes, the so-called yield curve, widened to 1.38 percentage points after reaching 1.34 percentage points yesterday, the most narrow in almost two weeks.

Volatility in Treasuries rose yesterday from five year lows. Bank of America Merrill Lynch’s MOVE index, which measures price swings based on options, increased to 52.3 basis points from 51.7 basis points the previous day, the lowest level since May 2007. It hit a 2012 high of 95.4 basis points on June 15. Volatility climbed to 264.6 basis points in October 2008 as the financial crisis intensified.

Treasury trading volume rose yesterday to the most in three weeks. About $281.5 billion changed hands, the most since Nov. 7, after trading below the 2012 daily average of $240 billion for almost a week, according to ICAP Plc, the largest inter- dealer broker of U.S. government debt.