Treasury 10-year yields touched the highest level in seven weeks amid speculation talks are progressing in Washington to resolve a budget showdown that threatens to send the economy into recession.
U.S. government securities pared losses before the Treasury sells $35 billion of five-year debt in the second of four note auctions this week totaling $113 billion. President Barack Obama, in talks yesterday with House Speaker John Boehner, lowered his tax revenue demand by $200 billion and offered to start tax-rate increases at $400,000 in income instead of $250,000.
“Treasuries are reacting to the continued progress on Washington negotiations,” said Jim Vogel, head of agency-debt research at FTN Financial in Memphis, Tennessee. “Markets like the middle-ground tone being struck.”
The benchmark 10-year yield was little changed at 1.78 percent at 9:06 a.m. New York time, according to Bloomberg Bond Trader prices. The yield touched 1.79 percent, the highest level since Oct. 26. The price of the 1.625 percent note due in November 2022 was 98 5/8.
The five-year note yield traded at 0.73 percent after earlier rising to 0.75 percent, the highest level since Nov. 6.
Bets Raised
Investors in Treasuries raised bets prices of the securities will drop, resulting in the most net-short positions in the week ended yesterday since June, according to a survey by JPMorgan Chase & Co.
The proportion of net shorts, or bets the securities will fall in value, was at six percentage points in the week ending yesterday, according to JPMorgan, up from four percentage points the week ended Dec. 10.
The percent of outright longs was steady at 15 percent, while the percent of outright shorts, or bets the securities will fall in value, rose to 21 percent, from 19 percent in the week ended Dec. 10, according to the survey. Investors cut neutral bets to 64 percent from 66 percent, the survey reported.
Yields rose earlier amid optimism on the budget talks in Washington. Obama’s revised plan would raise $1.2 trillion in taxes in the next decade and cut $1.22 trillion in spending, said a person familiar with the talks. Obama would accept a new inflation yardstick that would reduce Social Security cost-of- living increases, according to the person, who sought anonymity.
Boehner and Majority Leader Eric Cantor will give House Republicans an update on the negotiations today, said a leadership aide who requested anonymity.
More than $600 billion in tax increases and spending cuts will automatically start taking effect in January unless Congress acts. Failing to avert the fiscal cliff may push the economy in recession, according to the Congressional Budget Office.
The U.S. sold $35 billion of two-year notes yesterday. It will sell $29 billion of seven-year debt tomorrow and $14 billion of five-year Treasury Inflation Protected Securities on Dec. 20.
The five-year notes scheduled for sale yielded 0.76 percent in pre-auction trading, compared with 0.641 percent at the previous auction of the securities on Nov. 28.
Investors bid for 2.89 times the amount of available debt last month, compared with 2.73 times on Oct. 24.
Improved Performance
“Auction performance has improved in the five-year sector recently,” Mikael Nilsson Rosell, an analyst at Barclays Plc in London wrote in an e-mailed report. The firm is one of 21 primary dealers obliged to bid in U.S. debt auctions. “Since dropping sharply in the second quarter, the bid-cover ratio has recovered.”
The Federal Reserve will buy as much as $2.25 billion of Treasuries today maturing between February 2036 and November 2042 and sell as much as $8 billion of government debt due between June 2015 and November 2015, according to the New York Fed’s website. The transactions are part of a program known as Operation Twist, under which the central bank replaces shorter- maturity notes in its holdings with longer-dated debt.
With that set to expire this month, the Fed will start to buy U.S. government bonds next year in an expansion of a round of so-called quantitative easing that doesn’t involve selling shorter-term securities. Fed Bank of Dallas President Richard Fisher, scheduled to speak today, said last week that the central bank may never be able to exit its unprecedented bond- buying program.
U.S. gross domestic product expanded an annualized 2.8 percent in the three months ended Sept. 30, compared with the previously reported 2.7 percent growth, according to the median estimate of economists surveyed by Bloomberg News. The Commerce Department will release the updated figure on Dec. 20.
