TREASURIES-US 10-year yield near 2-mth low on fiscal cliff worry

SINGAPORE Thu Nov 15, 2012 10:34pm EST

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SINGAPORE Nov 16 (Reuters) - The U.S. 10-year Treasury yield hovered near a two-month low on Friday, with government bonds supported by worries that Congress may not be able to forge a deal in time to prevent large-scale fiscal tightening from taking effect early next year.

* Ten-year Treasuries rose 4/32 in price to yield roughly 1.581 percent, not far from a two-month low near 1.57 percent set earlier in the week.

* Democrats and Republicans dug in on their long-held opposing positions on the eve of budget and tax talks on Friday aimed at avoiding the "fiscal cliff" on Jan. 1. That is when about $600 billion worth of broad tax increases and deep spending cuts occur if Congress cannot decide how to replace them with less extreme deficit-reduction measures.

* "There is no telling what might happen with regard to the fiscal cliff," said Yoshio Takahashi, fixed income strategist for Barclays in Tokyo. "A very Treasuries-friendly environment is likely to persist," he added.

* The fact that the U.S. Federal Reserve seems likely to step up its buying of longer-term debt to offset the expiry of "Operation Twist" at the end of the year, is another supportive factor for Treasuries, Takahashi said.

The minutes of the Fed's October policy meeting released on Wednesday had underscored market expectations for the Fed to make such a decision next month.

Under the programme dubbed Operation Twist, the Fed has been selling short-term securities to buy longer-term debt, with the aim of pushing down long-term borrowing costs.

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