TREASURIES-Bond prices rise on standoff in U.S. budget talks

Wed Nov 28, 2012 11:37am EST

Related Topics

* Boehner's remarks soothe some "fiscal cliff" worries
    * U.S. to sell $35 billion of new 5-year notes
    * Fed buys Treasuries in two operations
    * U.S. new home sales unexpectedly fall in October


    By Richard Leong
    NEW YORK, Nov 28 (Reuters) - The absence of progress in
Washington in talks to avert a fiscal crisis lifted U.S.
government bond prices for a third straight day on Wednesday in
advance of a $35 billon auction of five-year federal debt.
    Bond prices pulled back from earlier highs after U.S. House
Speaker John Boehner said he was "optimistic" on reaching a
budget deal before the end of the year to avoid a crisis.  
    But the market hung in positive territory given the absence
of specifics on how the two major political parties plan to
arrive at a compromise on possible tax increases and spending
cuts. 
    Worries abound that gridlock between the White House and
Congress over the series of automatic tax increases and spending
cuts worth $600 billion that could phase in next year may well
push the U.S. over what has been dubbed the "fiscal cliff."
    This outcome could send the economy back into recession and
have underpinned safe-haven support for the bond market since
the U.S. presidential election three weeks ago.
    Investors dialed back hopes for a timely budget deal after
Senate Majority Leader Harry Reid, a Democrat from Nevada, said
on Tuesday he was disappointed there has been "little progress"
in the negotiations. 
    "Since his (Reid's) comments, the stock market has gone down
and bonds have been popping up," said Thomas Roth, executive
director of U.S. government bond trading at Mitsubishi UFJ
Securities USA in New York.
    Boehner's remarks following Reid's dour assessment were
similar in tone to what the top Republican lawmaker said
earlier. The bond market remained skeptical whether a fiscal
deal will be attained before year-end.
    "There is some more optimism from his (Boehner's) comments,
but they still have not agreed on the details on how they will
raise more revenues and how they will cut more spending so
there's a lot of work to be done," said Sean Incremona, senior
economic analyst at 4Cast Ltd in New York.
    Concerns over the possibility of the "fiscal cliff" kept
longer-dated Treasury yields below their 100-day moving
averages.
    Benchmark 10-year Treasury notes last traded
6/32 higher in price with a yield of 1.62 percent, down 2 basis
points from late on Tuesday and under its 100-day moving average
of 1.6495 percent, according to Reuters data.
    The 30-year bond was 11/32 higher in price,
yielding 2.769 percent, down 2 basis points from Tuesday's close
and below its 100-day moving average of 2.7875 percent.
    U.S. stocks turned higher, erasing earlier losses on
Boehner's remarks. They fell to session lows earlier after data
showed new single-family home sales fell slightly in October and
the government revised sharply lower its estimate for the prior
month's sales, denting optimism over one of the brighter sectors
of the economy.  
    In the futures and options market, traders were selling
volatility on the view that interest rates and bond yields will
hold in a tight range until a budget compromise is reached.  
    Given the market's preoccupation with the U.S. budget talks,
economic data have taken a back seat as a factor in
participants' perceptions about interest rates and Federal
Reserve policies.
    Domestic new home sales unexpectedly fell 0.3 percent in
October, with the prior month's gains revised lower. These data
reduced optimism about an acceleration in the housing market
recovery. 
 
    Later Wednesday, the Fed will release its Beige Book, an
anecdotal view from the Federal Reserve Districts on U.S.
economic conditions at 2 p.m. (1900 GMT).
    On the supply front, the Treasury Department will continue
its month-end sales of new short-to-medium-term debt, totaling
$99 billion.
    It will auction $35 billion in five-year notes at 1 p.m.
(1800 GMT), following record demand for $35 billion of two-year
notes on Tuesday. It will sell $29 billion of seven-year debt on
Thursday.
    In the "when-issued" sector, traders anticipated the
upcoming five-year supply to sell at a yield of 0.648 percent
, or lower than the yield of 0.774 percent on the
five-year notes sold in October.
    Meanwhile, the Fed will conduct two separate purchases of
Treasuries as a part of its "Operation Twist," a program aimed
at lowering long-term interest rates to help the economy.
    It bought $1.85 billion of Treasuries that mature in
February 2036 to November 2042 in the first operation. It will
later purchase $4.25 billion to $5.25 billion of bonds that
mature in November 2018 to November 2020 at 2 p.m. (1900 GMT).
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