Treasuries advanced for a third day amid speculation U.S. lawmakers will fail to reach agreement in time to avoid the so-called fiscal cliff of more than $600 billion in spending cuts and tax increases.
Ten-year notes headed for their first weekly gain in a month, pushing the yield below its 200-day moving average of 1.74 percent, as President Barack Obama summoned congressional leaders to a White House meeting today while the year-end deadline approaches. The Federal Reserve plans to buy as much as $5.25 billion of Treasuries today, the last purchase under its Operation Twist stimulus program.
“The probability that we are going over the cliff is over 50 percent and rising, which will continue to strengthen bonds,” Adrian Miller, director of global market strategy at GMP Securities LLC in New York, said in a telephone interview. “The bouts of optimism that sprang up in the market late yesterday have been extinguished.”
The benchmark 10-year yield slid four basis points, or 0.04 percentage point, to 1.7 percent at 10:13 a.m. in New York, according to Bloomberg Bond Trader prices. It was the lowest level since Dec. 14. The 1.625 percent note maturing in November 2022 rose 11/32, or $3.44 per $1,000 face amount, to 99 10/32. The yield has declined six basis points this week.
Yields on 30-year bonds decreased four basis points to 2.87 percent.
Previous Bets
The long-bond yields reached a three-month high of 3.03 percent on Dec. 18, and 10-year yields touched a seven-week high of 1.85 percent, on bets that U.S. leaders would resolve the budget showdown.
Treasuries remained higher even after the National Association of Realtors reported pending home sales in the U.S. rose for a third month in November. The group’s index climbed 1.7 percent to 106.4, the highest reading since April 2010.
“The only thing the market is focused on is the fiscal- cliff negotiations,” said Donald Ellenberger, who oversees about $10 billion as co-head of government and mortgage-backed securities at Federated Investors Inc. in Pittsburgh. “The fundamentals take a back seat to the headlines.”
Obama, who had been negotiating one-on-one with House Speaker John Boehner, will meet today with Republicans Boehner and Senate Minority Leader Mitch McConnell, as well as Senate Majority Leader Harry Reid and House Minority Leader Nancy Pelosi, both Democrats.
Lawmakers are disputing which party would be responsible for missing the deadline for a debt deal, a failure that could hurt the U.S. credit rating and cause an economic recession. The meeting will be held at 3 p.m. Washington time.
‘Remains Beholden’
“The Treasury market remains beholden to the progress on the budget debate, or more accurately the lack thereof,” Ian Lyngen, a government-bond strategist at CRT Capital Group LLC in Stamford, Connecticut, wrote in a note to clients. “We’re not entirely convinced that the moment for a compromise has passed, but the rhetoric does increasingly sound like the best we can hope for is a stop-gap or can-kicking resolution.”
John Brynjolfsson, chief investment officer at Armored Wolf LLC, said his firm is buying Treasury 10-year notes as lawmakers grapple in the budget-deficit showdown.
“That’s something that would benefit if the economy is dysfunctional and the Fed kind of steps up its open-mouth operations,” Brynjolfsson, who’s based in Aliso Viejo, California, said in an interview on Bloomberg Radio’s “Bloomberg Surveillance” with Michael McKee and Joe Brusuelas.
The efforts in Washington probably will produce “nothing that’s reasonable,” Brynjolfsson said.
Treasury Returns
U.S. government securities returned 2.3 percent in 2012 on an annualized basis through yesterday, set for the worst performance since a 3.7 percent loss in 2009, according to Bank of America Merrill Lynch indexes. The Standard & Poor’s 500 Index gained 16 percent, including reinvested dividends, amid signs the U.S. economy is improving.
Treasuries gained less than 0.1 percent this quarter and lost 0.4 percent this month, Merrill Lynch index data show.
A decline in bond yields this year surprised analysts. Economists began 2012 with predictions that 10-year yields would climb to 2.50 percent by Dec. 31 from 1.88 percent at the close of 2011.
The Fed plans to buy $45 billion of Treasuries a month at least as long as unemployment stays above 6.5 percent and inflation between one and two years ahead is projected to be no more than 2.5 percent. The central bank is also purchasing $40 billion of mortgage-backed securities each month.
The central bank will buy Treasuries today maturing from February 2021 to November 2022, according to the Fed Bank of New York’s website. The purchase is the last in the program to replace short-term Treasuries in the Fed’s holdings with longer- term debt to cap borrowing costs.
Ten-year yields will climb to 2.17 percent by the end of 2013, according to a Bloomberg survey of economists.
