Treasuries head for lowest average annual yield amid stalemate

Treasuries rose, pushing 10-year yields toward the lowest average annual yield on record, as U.S. leaders prepared to resume talks on a budget stalemate that may push the world’s biggest economy into recession.

The yield gap between U.S. 10- and two-year notes shrank to the least in almost two weeks even after data showed home prices climbed in October by the most since 2010. President Barack Obama plans to return to Washington tomorrow from a holiday vacation as a year-end deadline looms to avert more than $600 billion in automatic tax increases and spending cuts.

“We’re coming to the edge of the cliff, and time is running out,” said Larry Milstein, managing director in New York of government-debt trading at R.W. Pressprich & Co. “We’ve seen Treasuries start to grind higher over the last week or so. If it really starts to look into the first week of January that these guys aren’t moving, either side, and we’re really not making any progress, then I can certainly see a significant move in Treasuries.”

Benchmark U.S. 10-year yields fell two basis points, or 0.02 percentage point, to 1.76 percent at 2:57 p.m. in New York, according to Bloomberg Bond Trader prices. They have averaged 1.79 percent this year, the lowest on record. The price of the 1.625 percent security maturing in November 2022 increased 5/32, or $1.56 per $1,000 face value, to 98 26/32.

The 10-year yield has climbed from the record low of 1.38 percent reached in July. It compares with the average of 3.66 percent for the past decade.

Two-year Treasuries yielded 0.27 percent. The gap in yield between two- and 10-year notes was 1.49 percentage points, the least on a closing basis since Dec. 14.

Yield Curve

The yield difference, called a yield curve, plots the rates of bonds of the same quality but different maturities. It steepens when yields on shorter-maturity notes fall, those on longer-term bonds rise, or both. The gap typically narrows when investors anticipate slower economic activity and demand less compensation on expectations of limited inflation.

Trading in Treasuries was closed in Japan and stayed shut in the U.K. for Boxing Day, according to the Securities Industry and Financial Markets Association. It is taking place as usual in New York after being shut yesterday around the world for Christmas, according to the website.

Congress will return to session tomorrow with five days before the budget-agreement deadline under the terms of the August 2011 accord that raised the U.S. debt ceiling.

The Congressional Budget Office has said the automatic tax boosts and spending reductions may cause a recession next year.

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