TREASURIES-U.S. 10-year notes rally as 'fiscal cliff' hopes fade

Fri Dec 21, 2012 12:53am EST

Related Topics

* Boehner concedes 'Plan B' lacks enough votes to pass
    * Benchmark yields move away from this week's 8-week high

    By Lisa Twaronite
    TOKYO, Dec 21 (Reuters) - U.S. 10-year Treasuries rose in
Asia on Friday, with yields moving away from an eight-week high
hit this week, after Speaker of the U.S. House of
Representatives John Boehner conceded that his tax bill designed
to help avert "the fiscal cliff" lacked the votes to pass.
    Boehner said late on Thursday it was now up to President
Barack Obama to work with fellow Democrats in the Senate to
hammer out a deficit-reduction deal that could prevent automatic
spending cuts and tax hikes from taking effect next month.
 
    "The markets are likely to interpret this as signaling even
tougher negotiations in coming days," Mohamed El-Erian, chief
executive of bond giant PIMCO, told Reuters.     
    Boehner had pushed a "Plan B" -- which the White House had
threatened to veto -- that would have raised taxes on families
with net incomes over $1 million annually while extending other
tax breaks. The U.S. House of Representatives will adjourn until
after Christmas.
    "Treasuries rose after the 'Plan B' option didn't pass,"
said Ayako Sera, market economist at Sumitomo Trust and Banking.
"The market mood has turned pessimistic, and there's a flight to
quality into fixed-income assets, ahead of the long holiday
weekend."
    Japan's financial markets will be closed on Monday in
observance of the Emperor's birthday, and many markets around
the world will close on Tuesday for Christmas. 
    Yields on 10-year Treasuries sank to 1.7561
percent on Friday in Asian trade, after dropping as low as 1.746
percent, from 1.803 percent in late U.S. trade on Thursday.
  
    Earlier this week, the 10-year yield rose to an eight-week
high of 1.847 percent on rising optimism that a U.S. budget deal
was close. 
    "The quick reversal in yields was not what the markets was
expecting. Some were positioning for rising yields on the
conclusion of a deal, so the sharp move caught them by
surprise," said a fixed-income fund manager at a European asset
management firm in Tokyo. 
     Underpinning bonds, U.S. stock index futures fell sharply.
S&P 500 stock futures fell 1.6 percent, pressuring shares
in Asia. MSCI's broadest index of Asia-Pacific shares outside
Japan erased gains and shed 0.7 percent.  
    On the supply side, Thursday's $14 billion auction of
five-year Treasury inflation protected securities (TIPS)
 met strong demand, fetching a record negative yield
of 1.496 percent. 
    The U.S. Federal Reserve cancelled the sale of shorter-dated
Treasury debt that was tentatively scheduled for Dec. 27 as part
of the central bank's "Operation Twist" stimulus programme, the
New York Fed said on its website on Thursday, as the sale was
"no longer necessary." 
    On Thursday, the Fed bought $1.73 billion of Treasuries
maturing February 2023 through February 2031, followed by a
$7.42 billion sale of its short-dated debt holdings, as part of
its "Operation Twist" stimulus programme that will wind down
next week. 
    On the U.S. data front, separate reports on Thursday showed
sales of existing homes jumped and manufacturing in the
mid-Atlantic region improved.
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