TREASURIES-Bonds rise on U.S. budget talks, Israel worries

Fri Nov 16, 2012 3:12pm EST

Related Topics

* Obama, top lawmakers hold budget talks
    * Israeli, Palestinian fighting keeps investors on edge
    * Benchmark yields touch lowest levels since early Sept
    * Storm-skewed industrial data suggests slowing U.S. growth


    By Richard Leong
    NEW YORK, Nov 16 (Reuters) - U.S. government debt prices
rose on Friday with yields touching their lowest levels in over
two months on skepticism over whether Washington will produce a
deal to avoid a budget crisis and worries about fighting between
Israel and the Palestinians.
    The bond market's gains were capped by stabilization in Wall
Street stocks which have been pummeled by fears that U.S.
President Barack Obama and Congress will fail to reach a timely
compromise to avoid the "fiscal cliff," a series of automatic
tax hikes and spending cuts which would phase in in early 2013.
    Such a severe move could stun the U.S. economy back into
recession, according to many economists.
    "There's a lot of fears with the fiscal cliff and the Middle
East," said Charles Comiskey, head of Treasury trading at the
Bank of Nova Scotia in New York. "Treasuries continue to be a
safe-haven security. A lot of money is pouring in here."
    The bullish tone in Treasuries was also supported by data
showing U.S. industrial output unexpectedly fell 0.4 percent in
October due to Sandy, a deadly storm that disrupted businesses
along the East Coast, although the trend was consistent with
slowing manufacturing activity. 
    Benchmark 10-year Treasury notes rose 6/32 in
price at 100-15/32, yielding 1.574 percent, down 2 basis points
on late Thursday.
    The 10-year yield was on track to fall for a fourth straight
week, touching 1.556 percent earlier, which was only 17 basis
points above its record low set in late July.
    Major U.S. stock indexes rebounded from their initial
losses, although the Standard & Poor's 500 index has
fallen more than 4 percent lower over the past two weeks. 
    On Friday, top lawmakers from both major U.S. political
parties spoke after a meeting at the White House, hinting at the
possibility of a budget compromise that involves spending cuts
and additional revenue, although they were short on details.
 
    Some analysts saw encouraging signs a deal will emerge
within six weeks before the "fiscal cliff" starts to kick in,
while others were doubtful that the Democrats and Republicans
were close to a compromise about raising taxes and reducing
social programs including Medicare.
    Some analysts believe Washington will likely come up with an
agreement that provides short-term fixes to the most contentious
issues on taxes and spending so they could buy time to negotiate
longer-term deficit reduction goals.
    "A grand bargain is just as hard to attain as it was
eighteen months ago. A lesser bargain is more likely, which will
appease both sides," said Guy LeBas, chief fixed-income
strategist at Janney Montgomery Scott in Philadelphia.
    While U.S. lawmakers sought to comfort financial markets,
the fighting between Israelis and Palestinians kept investors on
edge with signs of growing mobilization on both sides.
 
    Investors also watched developments in Greece whose
international lenders have been squabbling over how to keep the
heavily indebted nation solvent. 
    While anxious investors have flocked into Treasuries to
shield their cash from the uncertainties in Washington, Europe
and the Middle East, some strategists cautioned against holding
an excessive amount of U.S. government debt whose longer-dated
yields are barely keeping up with inflation.
    "There's a real yield deficit," said Dan Heckman, senior
fixed income strategist at U.S. Bank Wealth Management in
Minneapolis. He recommended investors hold high-quality
corporate and municipal bonds for their higher yields.
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