CORRECTED-TREASURIES-Bond prices climb as U.S. nears 'fiscal cliff'
(In fourth paragraph from end, corrects to say that the scenarion echoed what happened in August 2011, no last August) * Senate leader Reid hints U.S. might go over 'fiscal cliff' * U.S. fast approaching debt ceiling, Geithner tells Congress * Trading volume picks up but still light after Christmas * Fed buys $4.61 bln in Treasuries due 2018-2020 for "Twist" * January T-bill interest rates turn negative By Richard Leong NEW YORK, Dec 27 (Reuters) - U.S. Treasury debt prices rose on Thursday on safe-haven buying after the U.S. Senate majority leader hinted a federal budget deal was unlikely before a year-end deadline, raising chances of a burdensome package of tax hikes and spending cuts next year. This series of automatic fiscal maneuvers worth $600 billion, commonly referred to as the "fiscal cliff," is set to phase in after Monday, raising fears of a U.S. recession. "It looks like that is where we're headed," Harry Reid, the Democrat leader of the Senate, said of the likelihood of the U.S. economy going over the "fiscal cliff". Nervous investors sold stocks and other risky assets and piled into Treasuries, sending the interest rates on T-bills for delivery in early January into negative territory in reaction to Reid's glum assessment. "That seemed to be the catalyst for the rise in bond prices. It doesn't take much to spark this thinly-traded market," said David Keeble, global head of interest rates strategy at Credit Agricole Corporate & Investment Bank in New York. The budget negotiation stalled last week as the White House and Republicans remained far apart on issues of income tax hikes and spending cuts to social programs. Some traders earlier had bet that a minor, temporary fix might still be approved by next Monday as President Barack Obama and Congress returned from their Christmas vacation. Most analysts said chances have faded that a timely budget compromise will materialize and the bond market is poised for further gains after Reid's pessimistic remarks. "That's probable if it looks like we're going over and there's still no agreement in sight," said Richard Gilhooly, interest rates strategist at TD Securities in New York. Despite Tuesday's moves, longer-dated debt prices and the shape of the yield curve suggested market expectations about the fiscal cliff have not shifted that much this week. Benchmark 10-year notes were 10/32 higher in price to yield 1.714 percent, down 3.6 basis point from late on Wednesday. The 10-year yield has fallen more than 13 basis points since touching an eight-week high last week. Thirty-year bonds rose 22/32, erasing an earlier 25/32 loss, to yield 2.885 percent, down 3.8 basis points from Wednesday. Among T-bills, interest rates on issues due in the first half of January were quoted at minus 0.25 to 0.50 basis points. Trading volume rose from Tuesday as most European markets reopened after the Christmas holiday, but it remained well below average. Anxiety about a possible recession if the U.S. goes over the 'fiscal cliff' overshadowed news that jobless claims fell to a near 4-1/2 year low and November new home sales rose to their highest since April 2010. Those positive readings were mitigated by a deterioration in consumer confidence, which fell to its weakest level in four months. Meanwhile, the Federal Reserve bought $4.614 billion in notes due 2018-2020, as a part of its Operation Twist, which involves buying long-term debt and funding the purchases with sales of short-term notes. The Fed will replace the Twist program with outright bond purchases ranging from five years to 30 years next year. DEBT CEILING In addition to being the deadline on the fiscal cliff, Monday marks the day the federal government is set to reach its $16.4 trillion debt limit, the Treasury Department said late on Wednesday. To cut government spending and delay bumping up against the debt ceiling, the Treasury will suspend issuance of state and local government series securities -- known as "slugs" -- beginning on Friday, Treasury Secretary Tim Geithner wrote in a letter to Congressional leaders. The Treasury will take other measures to buy time for the government to approve a debt ceiling increase. This scenario echoed what happened in August 2011 when there was a stalemate between the White House and Congress on raising the federal debt limit and fears grew about a U.S. default. While Standard & Poor's stripped the U.S. of its top-notch credit rating, Treasuries prices quickly recovered from losses after the debt ceiling was raised. Credit Agricole's Keeble said Treasury bills due in January and February are the "perfect thing to buy" in case the Treasury runs out of options to raise new debt. Ironically if the fiscal cliff kicks in and a budget deal is not quickly reached thereafter, the government would have more cash on hand to pay its debt because of the spending cuts and tax increases, Keeble said. (Additional reporting by Karen Brettell; Editing by Chizu Nomiyama and Andrew Hay)
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