TREASURIES-Prices gain amid skepticism over U.S. budget talks

Fri Nov 16, 2012 10:42am EST

Related Topics

* Obama, congressional leaders due to hold budget talks
    * Benchmark Treasury yields hold just above 10-week low
    * US industrial production falls unexpectedly in October

    By Chris Reese
    NEW YORK, Nov 16 (Reuters) - U.S. Treasury debt prices rose
slightly on Friday, with yields near two-month lows on investor
skepticism that budget talks aimed at preventing large-scale
automatic fiscal tightening will be immediately successful.
    The "fiscal cliff" that the United States is trying to avoid
amounts to about $600 billon of tax increases and spending cuts
that would automatically come into force early next year if
Congress fails to agree on less-extreme measures. Investors are
afraid the spending cuts and tax increases will push the U.S.
economy back into recession.
    Newly re-elected President Barack Obama and congressional
leaders were due to hold budget talks on Friday. Democrat Obama
advocates raising taxes for wealthy Americans while Republicans
oppose any tax hikes. 
    "The markets will remain cautious into today's congressional
budget negotiations and ahead of the weekend," said Michael
Englund, chief economist at Action Economics in Boulder,
Colorado, adding "we doubt we'll hear anything constructive from
lawmakers."
    The Wall Street Journal reported on Friday that White House
officials were in advanced internal discussions that could
indicate increased flexibility to negotiate on the potential
budget crisis.
    Citing sources familiar with the matter, the Journal said
officials were in talks to replace spending cuts set to begin in
January with a separate package of spending cuts and tax
increases.
    The White House had no comment on the report.
    Benchmark 10-year Treasury notes were trading
3/32 higher in price to yield 1.58 percent, down from 1.59
percent late Thursday and not far off a 10-week low of 1.57
percent touched on Tuesday.
    The bullish tone in Treasuries was supported by data showing
U.S. industrial output unexpectedly fell in October as
superstorm Sandy disrupted production, although the underlying
tone of the report remained consistent with slowing
manufacturing activity.
    "The bond market rallied a tiny bit around the time of the
industrial production report, but what limited the market's
reaction was the statement the Fed put out saying the distortion
from superstorm Sandy was massive," said Michael Cloherty, head
of U.S. rates strategy at RBC Capital Markets LLC in New York.
    "So that reduces the informational content of the report
from the perspective of using it to forecast what is likely to
happen in the rest of the quarter," he said.
    Outside of U.S. fiscal negotiations, investors are also
watching developments in Greece. Its international lenders are
squabbling over how to fix its long-term debt sustainability,
delaying an aid payment Athens needs to stay afloat.
    The safe-haven appeal of U.S. government debt was also
underpinned on Friday by worries over a possible escalation of
violence in the Middle East after Israeli attacks in the Gaza
Strip intended to end militant rocket fire at Israel.
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