Treasury 10-year yields approach 5-week high amid budget talks

Treasuries fell, pushing 10-year note yields toward a five-week high, as investors weighed prospects for a budget deal in Washington and the U.S. prepared to sell $35 billion in two-year notes.

Benchmark 10-year notes pared their slide after House Speaker John Boehner signaled last week he’s open to allowing tax rates to rise for millionaires. The Treasury will auction $113 billion in notes this week. China increased its holdings of Treasuries in October, data showed.

“People will be trading on any rhetoric on the fiscal cliff, both positive and negative,” said Jason Rogan, director of U.S. government trading at Guggenheim Partners LLC, a New York-based brokerage for institutional investors. “That will be the main driver for yields in the market. There’s a decent amount of supply coming to market. It’s weighing a bit on the market.”

The yield on the 10-year Treasury note increased two basis points, or 0.02 percentage point, to 1.72 percent at 10:34 a.m. New York time. It touched 1.73 percent, after reaching 1.75 percent on Dec. 14, the highest level since Nov. 7.

The note’s losses were tempered as its yields failed to breach 1.75 percent, their 200-day moving average.

The price of the 1.625 percent security due in November 2022 declined 5/32, or $1.56 per $1,000 face amount, to 99 5/32.

Note Auctions

The two-year notes to be sold today yielded 0.245 percent in pre-auction trading, compared with 0.27 percent at a previous sale on Nov. 27.

The U.S. also will sell $35 billion of five-year notes tomorrow and $29 billion of seven-year debt a day later. It will auction $14 billion in five-year Treasury Inflation Protected Securities on Dec. 20.

“The auctions will go fine,” said Jeffry Feigenwinter, head of Treasury trading in New York at Societe Generale SA, one of 21 primary dealers that trade Treasuries with the Federal Reserve. “The biggest factor in the market is the situation in Washington... They may be closer to a compromise. I’m hopeful.”

Boehner offered to raise income tax rates on households earning more than $1 million a year in exchange for containing the cost of federal entitlement programs, as part of a deal with President Barack Obama to cut the federal deficit, according to two people familiar with the talks. The U.S. faces more than $600 billion of automatic spending cuts and tax boosts if lawmakers fail to reach an accord, and the Congressional Budget Office has said a recession could result.

Boehner’s offer, made in a Dec. 14 phone call between the two leaders, marked the first time Boehner entertained an increase in income-tax rates in his talks with Obama. Republicans and Democrats in Congress also are starting to talk about the benefits of waiting until January to reach a deal.

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