TREASURIES-Prices gain for a third day on fiscal deal doubts

Fri Dec 28, 2012 4:40pm EST

Related Topics

* Benchmark 10-year note yields lowest in two weeks
    * Fiscal, economic fears seen boosting Treasuries
    * S&P says government impasse doesn't affect U.S. rating

    By Karen Brettell and Chris Reese
    NEW YORK, Dec 28 (Reuters) - U.S. benchmark Treasury debt
prices rose for a third consecutive session on Friday on
safe-haven buying as hopes faded for a deal to avoid tax hikes
and spending cuts that could throw the U.S. economy back into
recession.
    Investors are focused on Washington as President Barack
Obama and lawmakers launch a last-chance round of budget
negotiations days before a New Year's deadline to reach a deal.
Expectations remained low a deal would be reached by the
deadline. 
    Window-dressing for year-end and month-end extension buying
also boosted demand for Treasuries on the next-to-last trading
day of 2012.
    "The market has lost the optimism it had over a deal getting
done, it was much more optimistic a week ago," said Jason Rogan,
managing director in Treasuries trading at Guggenheim Partners
in New York.
    Benchmark 10-year notes traded 12/32 higher in
price, with yields falling to 1.69 percent, marking the lowest
in two weeks and down from 1.73 percent late Thursday. Benchmark
notes posted their biggest daily dip in yield in over seven
weeks and were down about eight basis points on the week.
    Concerns that lawmakers will fail to reach a deal to resolve
the fiscal crunch by year-end are expected to keep a bid for
Treasuries in the coming days, or weeks.
    "I think the most likely scenario is that we will probably
go over the cliff, there is a lot of posturing on both sides,"
said John Fath, managing partner at BTG Pactual in New York.
    Many investors expect that negotiations will extend beyond
Monday's deadline, with some kind of agreement likely in the
first few weeks of January.
    "There is the assumption that something will get done. As
time continues to go on with no deal taking place I think you
will start to see the market really start to get a
flight-to-quality bid," said Guggenheim's Rogan.
    Some fear that lawmakers are unlikely to reach a substantive
consensus on how to reduce the U.S. deficit, with the most
likely outcome that they will agree on smaller issues in early
January and then push back negotiations on larger issues to
later in 2013.
    Such a delay could also increase the risk of further
negative actions on the U.S. credit rating.
    S&P ratings agency said on Friday it does not expect the
negotiations over the fiscal cliff to have an impact on the
sovereign credit ratings of the U.S. federal government. The
ratings agency said, however, it did not expect to remove a
negative outlook on the U.S. credit rating if Republicans and
Democrats reach a short-term deal. 
    In August 2011, when Standard & Poor's cut the U.S. credit
rating to the second highest investment grade, Treasuries
rallied, though investors have said there's no certainty the
market would react the same way a second time.
    "The knee-jerk reaction is that there could be a move to
flight-to-quality," said BTG's Fath. Longer term, he said,
"there might be a bit of an illusion in the marketplace,
particularly with lawmakers, that it will have no effect or
bearing on rates, but at some point it will."
    Fitch Ratings and Moody's Investors Service both have top
triple-A ratings on the United States; all three major rating
agencies have a negative outlook on the country.
    Thirty-year Treasury bonds on Friday traded
27/32 higher in price to yield 2.86 percent, down from 2.91
percent late Thursday.
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