TREASURIES-Bonds rally as U.S. fiscal deal recedes on horizon

Fri Dec 21, 2012 1:34pm EST

Related Topics

* U.S. speaker's own party kills bill as fiscal cliff nears

* Ten-year yields ease further off eight-week highs

* Yields could continue to fall if no deal by year-end

By Ellen Freilich

NEW YORK, Dec 21 (Reuters) - U.S. Treasuries rallied on Friday as investors sought safety after a split in the Republican party reduced the chances Washington will reach a deal this year to avoid a package of tax hikes and spending cuts set to start in 2013.

Yields on 10-year Treasuries extended a fall late Thursday after House of Representatives Speaker John Boehner acknowledged his bill lacked the votes to pass.

"It's all about the 'Plan B' failure last night. That triggered a huge selloff in equities so Treasuries are rallying," said Thomas Simons, money market economist at Jefferies & Co. in New York.

The development sent the benchmark 10-year Treasury note up 13/32 in price, and its yield eased to 1.76 percent from 1.80 percent on Wednesday.

The 30-year Treasury bond rose more than a point in price, driving the yield down to 2.93 percent from 2.98 percent late Wednesday afternoon.

"Why are Treasuries higher? In a word: Boehner," said John Canavan, fixed income analyst at Stone & McCarthy Research Associates in Princeton, New Jersey, noting Boehner's failure to win support from Republicans for his Plan B bill. "Republicans packed up after the failure and said there would be no votes until after Christmas. Our toes are hanging over the fiscal cliff at this point," Canavan said.

"With no agreement currently in sight, and time needed to write and pass the bills even after an agreement is reached, there appears to be no chance we won't go fully over that cliff at least temporarily," he added.

Earlier this week, the U.S. benchmark 10-year yield rose to an eight-week high of 1.847 percent on rising optimism that a budget deal was close.

Ten-year yields could pull further away from those highs, traders and strategists said, though if a compromise is reached before year end, the rally in safe-haven debt could be curbed.

The development on the fiscal cliff talks "suggests the path of least resistance for stock prices and yields is going to be lower until it becomes clear that there really is a common-denominator-deal that can pass," said Robert Tipp, chief investment strategist with Prudential Fixed Income in Newark, New Jersey, which has about $350 billion in assets under management.

The struggle over the fiscal cliff made economic data releases a bit of a subplot for the market.

Government data showed U.S. consumer spending rose in November by the most in three years, and a measure of planned business spending jumped last month.

"The economy is holding in here at the end of the year despite the concerns about the fiscal cliff," said Gary Thayer, an economic strategist at Wells Fargo Advisors in St. Louis.

One report, however, suggested that Americans were concerned about the tax hikes and spending cuts that could go into effect in the new year if an agreement is not reached. The Thomson Reuters/University of Michigan's consumer sentiment index slumped more sharply than expected in December.

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