TREASURIES-Budget standoff lifts U.S. bond prices

LONDON Wed Nov 28, 2012 6:28am EST

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LONDON Nov 28 (Reuters) - U.S. Treasury debt prices pushed higher on Wednesday, supported by concern over a lack of progress in talks to avert a massive fiscal tightening that could damage the fragile economic recovery.

* Treasuries extended the previous day's late rally triggered by Senate Majority Leader Harry Reid, who said he was disappointed there had been "little progress" among Democratic and Republican lawmakers as they try to reach a deal to avoid the year-end "fiscal cliff".

* The fiscal cliff is a series of automatic tax hikes and spending cuts that will begin in early 2013 unless Congress and the White House agree on measures to avoid them.

* "Reid implied that progress was not forthcoming at the moment so ... the market squeeezed higher and we also had a good two-year (bond) auction on worries about the fiscal cliff. We've kept the bid going," a trader said.

* The 10-year T-note price rose 4/32 to yield 1.62 percent , down 2 basis points from late U.S. trade on Tuesday while the T-note future was last up 7/32 at 133-30/32.

* While bond yields are likely to climb if a deal is reached to avoid the fiscal cliff, the potential a sustained rise will hinge on the contents of the deal, a portfolio manager for a major Japanese bank in Tokyo said.

* If there is only an agreement to buy time, putting off the fiscal cliff for three to six months or a year, concerns over political deadlock are likely to persist, he said. In that case, a rise in the 10-year yield may prove short-lived, with buyers likely to step in at levels near 1.9 percent.

* Treasury yields, however, could see a more enduring rise if a "grand bargain" is struck over long-term deficit reductions, the portfolio manager said.

* "That would dispel worries about politics and Congress, and could make it easier for risky assets to head higher over the medium to longer term. Bonds are likely to be sold initially and bond yields might keep heading higher from there," he said.

* Traders' attention on Wednesday will also be on a $35 billion sale of five-year notes later in the day, which most expected to meet strong demand following solid bidding at a two-year note auction on Tuesday.

* The five-year T-note yield was quoted at 0.65 percent in the when-issued market, compared with 0.64 percent yielded in the secondary market by the current five-year note.

* "We may cheapen up going into the auction but you're going to see reasonable demand," another trader said.

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