TREASURIES-U.S. fiscal worries, Spain underpin safety bid

Mon Nov 26, 2012 8:42am EST

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By Ellen Freilich
    NEW YORK, Nov 26 (Reuters) - U.S. Treasury prices rose on
Monday as fiscal challenges in the United States and political
uncertainty in Spain fed investors' appetite for safe-haven
assets.
    The gains followed losses last week in thin holiday trading
after signs a deal might be reached to avert the "fiscal cliff"
of spending cuts and tax increases - due to take effect in early
2013 - allowed the safety bid to dwindle.
    However, by Monday the optimism on the fiscal cliff talks
seemed more tempered, although gains in Treasuries could still
be limited by the conviction that if the so-called fiscal cliff
can be avoided, U.S. economic growth will safely outpace that of
the euro zone and Japan in 2013.  
    "Reports of very little compromise over recent discussions
on the 'fiscal cliff' are driving rates lower," said Tom
diGaloma, managing director at Navigate Advisors LLC in
Stamford, Connecticut.
    Safe-haven buying also occurred as the European Union "is
still sorting out Greece and Catalonia takes steps towards
independence from Spain," he said.
    Separatists in Catalonia won a large majority in regional
elections. A deep recession and high unemployment have fueled
the separatist mood in Catalonia, which represents a fifth of
Spain's economy, piling political uncertainty on top of Prime
Minister Mariano Rajoy's economic problems. 
    "Buyers of 10- and 30-year Treasury paper moved the market
higher and flattened the yield curve before front-end supply
this week," diGaloma said
    Benchmark ten-year U.S. Treasury notes rose 9/32
in price, easing yields to 1.66 percent from 1.70 percent on
Friday.
    Thirty-year Treasury bonds rose 23/32 in price, bringing
their yields down to 2.80 from 2.83 percent on Friday.
    "Given the six purchases of long-end paper expected from the
Fed and (a total of $99 billion in) supply of two-, five- and
seven-year paper from Treasury auctions, the curve should
flatten this week," he said.
    Uncertainty about resolving the "fiscal cliff" should also
favor lower U.S. yields going into year-end, diGaloma said.
    Euro zone finance ministers and the International Monetary
Fund will seek to unfreeze the second bailout package for Greece
on Monday, but they will first need to agree on whether some of
the official loans to Athens might eventually be forgiven to cut
Greek debt. 
    Bond prices rose even though the market faces $99 billion of
supply this week. The U.S. Treasury Department will sell $35
billion of two-year notes on Tuesday, $35 billion
of five-year notes on Wednesday and $29 billion
of seven-year notes on Thursday.
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