TREASURIES-Bonds supported in Asia on fiscal cliff, Fed hopes

TOKYO Wed Dec 5, 2012 11:09pm EST

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TOKYO Dec 6 (Reuters) - U.S. Treasuries were firm in Asia on Thursday, with the yield on 10-year notes near a three-week low on concerns over the fiscal cliff as well as hopes for fresh easing steps by the Federal Reserve.

* The 10-year notes traded at a yield of 1.591 percent , little changed from late U.S. levels and near Wednesday's low of 1.576 percent, which was its lowest level in nearly three weeks.

* Although many investors expect political leaders in Washington to eventually reach a deal to avert a sharp fiscal contraction from the planned spending cuts and expiry of tax cuts early next year, there was no sign of progress in talks on Wednesday.

* The White House and Republicans in Congress spent much of the day talking up their positions.

* "Most people think there will be a deal at some point. Still I guess politicians cannot compromise easily, which means there's risk they will go off the cliff," said a trader at a Japanese bank.

* The two-year yield stood at 0.238 percent, and could fall to its lowest level since early October, as market players expect the Federal Reserve to end selling in short-term notes as the Operation Twist expires this month.

* Economists expect the Fed to replace the Operation Twist, in which it buys long-dated bonds and sells the same amount of shorter-dated ones, with a fresh bond buying programme.

* "Because of Operation Twist, brokers have a large amount of short-term bonds. That will probably disappear next year," said the trader.

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