TREASURIES-Bonds up, looming U.S. budget cuts feed safety bid

Thu Feb 28, 2013 12:56pm EST

Related Topics

* Month-end buying cited as money managers adjust portfolios
    * Fed's commitment to bond purchases supportive
    * GDP bullish for bonds, jobless claims data bearish


    By Ellen Freilich
    NEW YORK, Feb 28 (Reuters) - U.S. Treasuries rose on
Thursday as investors bought safe-haven U.S. debt on the eve of
federal budget cuts with the potential to damp growth.
    The automatic spending cuts, known as sequestration, were
due to take effect on Friday.
    Month-end buying as money managers adjusted their average
portfolio duration to meet benchmarks was also supportive.
    So was reassurance from Federal Reserve Chairman Ben
Bernanke this week that the U.S. central bank believed in the
usefulness of its unconventional monetary easing strategies and
that its bond purchases would continue.
    "The budget negotiation related to the sequestration adds a
great deal of uncertainty and that has led to a re-emergence of
a flight to quality," said Dan Heckman, senior fixed income
strategist at Minneapolis-based U.S. Bank Wealth Management.
    The International Monetary Fund warned on Thursday it would
likely cut its growth forecasts for the United States and the
global economy if the spending cuts take effect. IMF spokesman
William Murray said the IMF would likely shave the 2013 U.S.
growth forecast by at least 0.5 percentage point if the cuts are
fully implemented. The IMF now projects the U.S. economy will
grow 2 percent this year. 
    U.S. ECONOMIC DATA
    Two reports, one on the U.S. economy's growth in the fourth
quarter and the other on the new jobless claims count for the
week ended Saturday, taken together, were neutral for bonds.
    The government said U.S. gross domestic product grew 0.1
percent in the fourth quarter of 2012. That was less than the
very modest 0.5 percent growth the market had expected.
    New claims for unemployment insurance, however, totaled
344,000, fewer than the 360,000 claims economists had forecast.
    "There was very little reaction in the bond market to this
morning's data," said Tom DiGaloma, managing director at
Navigate Advisors in Stamford, Connecticut. "Jobless claims
dropped significantly, but the revisions to GDP showed growth in
the fourth quarter was still quite weak."
    SEQUESTER AHEAD
    President Barack Obama and Republican congressional leaders 
have yet to reach a deal to avert the $85 billion worth of 
spending cuts, which economists say will hurt the economy.
    Strategists say the cuts, or protracted negotiations over
them, supported demand for low-risk government debt. 
    "The risks are to the downside in part from the potential,
additional fiscal drag from the sequestration," said Michael
Pond, head of global inflation-linked research at Barclays
Capital. "Even if they come up with an alternative, the
alternative would not be no cuts, but maybe different cuts. That
still means growth will not be as strong as it would have been
without the cuts."
    The benchmark 10-year Treasury note was up 4/32,
its yield easing to 1.89 percent from 1.90 percent late on
Wednesday.
    Thirty-year Treasury bonds rose 9/32 in price,
their yields easing to 3.09 percent from 3.10 percent late on
Wednesday.
    The revived bid for safe-haven U.S. debt emerged after
interest rates rose for much of February on the view that "some
of the factors that had been giving the market jitters seemed
under control," said  Mike Materasso, senior vice president and
co-chair of Franklin Templeton's fixed income policy committee.
    "Then the Italian elections early this week reminded us that
we were still in a volatile environment and that triggered some
profit-taking. Trades that had done well for several weeks saw
some unwinding," he said.
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