Treasuries rise as looming spending cuts spur demand for safety

Far Apart

U.S. lawmakers are far apart on alternatives to the reductions totaling $1.2 trillion over nine years, $85 billion of which would occur in the remaining seven months of this fiscal year. The cuts may lower gross domestic product by 0.6 percentage point and cost 750,000 jobs by the end of 2013, according to the Congressional Budget Office.

Democrats say tax increases must be part of a replacement plan, which Republican leaders oppose. Democrats say they expect the public to place more blame on Republicans, rather than President Barack Obama, for any reduced federal services.

Fed Chairman Ben S. Bernanke said yesterday the central bank’s easing policies are helping to improve demand for homes and cars by lowering long-term interest rates.

The bank bought $1.45 billion today of securities maturing from February 2036 up to August 2042. It will announce its March schedule of purchases at 2 p.m.

U.S. GDP

The U.S. economy grew at a 0.1% annual rate from October through December, up from a previously estimated 0.1% drop, revised figures from the Commerce Department showed today in Washington. The median forecast of 83 economists surveyed by Bloomberg called for a 0.5% gain.

Treasury gains were tempered as the MNI Chicago Report business gauge rose to 56.8, the highest level since March, after a reading of 55.6 in January. Numbers greater than 50 signal expansion. The median forecast of 51 economists surveyed by Bloomberg was for 54.

Initial claims for jobless benefits in the U.S. decreased by 22,000 to 344,000 last week, the Labor Department said in Washington. The median forecast of 44 economists surveyed by Bloomberg called for 360,000 applications.

Ten-year yields will fall to 1.85% by March 31 and rise to 2.31% by year-end, according to a Bloomberg survey of financial companies with the most recent projections given the heaviest weightings.

Italian Debt

Treasuries trailed their Italian and Spanish counterparts today amid speculation Italy’s lawmakers will set aside their differences and form a coalition government, reducing demand for the U.S. and German government bonds as havens.

The Italian 10-year yield fell as much as eight basis points to 4.74%, while Spain’s dropped 10 basis points to 5.13%.

“Everything is firming up again,” said Michael Franzese, senior vice president of fixed-income trading at ED&F Man Capital Markets in New York. “It looks like Europe is not as bad as it was going to be.”

The yields climbed earlier this week as Italian parliamentary elections Feb. 24-25 failed to give any party a clear majority. That cast doubt on the stability of the next government and spurred bets the country’s commitment to austerity may be diluted, worsening Europe’s debt crisis.

Bloomberg News

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