TREASURIES-U.S. Treasuries up slightly amid fiscal muddle

Thu Dec 20, 2012 12:29pm EST

Related Topics

By Ellen Freilich

NEW YORK Dec 20 (Reuters) - U.S. Treasuries prices rose slightly on Thursday, despite stronger than expected economic data, as investors stuck to safe-haven government bonds in case tax increases and spending cuts take effect next year and curb economic growth.

As a year-end deadline looms, Republicans in the U.S House of Representatives pushed ahead with their own "fiscal cliff" plan to avoid steep tax hikes and spending cuts. But President Barack Obama has vowed to veto the plan, which only raises taxes on people making more than $1 million a year.

Benchmark 10-year Treasury notes rose 3/32, their yields easing to 1.79 percent from 1.80 percent late on Wednesday.

"It's all about the fiscal cliff resolution and it doesn't look like we are getting one, so a safe-haven bid is resulting going into year end," said Tom DiGaloma, managing director at Navigate Advisors LLC in Stamford, Connecticut.

The 10-year Treasury yield rose to 1.847 percent on Tuesday, its highest in about two months, on rising expectations the White House and Congress were moving closer to reaching a deal on the budget. But as that goal has looked more elusive, investors have bought Treasuries.

Economic reports showed that jobless claims fell, sales of existing homes jumped, and manufacturing in the mid-Atlantic region improved notably. All of that should have been bearish for Treasuries.

But that news was overshadowed by the prospect of tax increases and spending cuts in the coming year that would depress economic growth.

"It's not about the economic data at this point," said Ian Lyngen, senior government bond strategist at CRT Capital LLC in Stamford, Connecticut. "The market is all about the fiscal cliff and there is no progress on that front."

Yields near their highest levels in almost two months also lured buyers.

Many investment managers and trading strategists say the current 10-year yield - at 1.80 percent - is at the upper end of its trading range and could move lower, especially if the austerity package of tax hikes and spending cuts goes into effect next year with no amelioration.

"This market is going through a tug of war," said Robert Tipp, chief investment strategist with Prudential Income in Newark, New Jersey. "We're seeing better underlying data in the U.S. and yet the market is holding narrow gains on the day."

Tipp said the better data and previous optimism that the United States would not go over the fiscal cliff let investors experiment with how high Treasury yields would go in a global economic environment that looks better than investors' worst fears.

"But after a move to 1.80 percent (on the 10-year Treasury yield), it looks like the selloff is running out of stream," he said. "The overwhelming amount of demand relative to supply continues to keep yields at really modest levels."

Some of that demand is from the Federal Reserve as the central bank tries to stimulate economic activity through accommodative monetary policy.

As part of that effort, the Fed on Thursday bought $1.729 billion of Treasuries maturing February 2023 through February 2031.

The final Treasury auction of the year is set for this afternoon: a $14 billion re-opening of five-year Treasury Inflation-Protected Securities (TIPS).

FILED UNDER:
Comments (0)
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.