| NEW YORK
NEW YORK Dec 18 U.S. Treasury yields on Tuesday
steadied just below their highest levels since October as U.S.
lawmakers edged closer to a deal to avert a fiscal crisis in
According to a source familiar with the talks, President
Barack Obama made a counter-offer to Republicans that included a
major change in position on tax hikes for the wealthy and helped
narrow the differences between the two sides.
Progress in the talk would allow the United States to avoid
tax hikes and spending cuts in the new year, developments that
would benefit the economy and deplete the bid for safe-haven
U.S. government debt.
A lack of agreement would result in more taxes and spending
cuts, an austerity package that would tend to depress economic
growth and boost the bid for safe-haven U.S. government debt,
leading to higher prices for U.S. Treasuries and lower yields.
"Treasuries opened off their overnight lows when positive
news broke about the fiscal cliff," said Justin Lederer, market
analyst at Cantor Fitzgerald.
"Volumes were fairly heavy" as yields reached their highest
levels in weeks, he said.
U.S. borrowing costs over 10 years were flat at
1.78 percent after rising to 1.796 percent in Asian trading, the
highest since Oct. 26. The benchmark 10-year note was down 2/32
Thirty-year yields were little changed at 2.95
percent, after rising to 2.97 percent overnight, also the
highest since late October.
The U.S. Treasury market has been range-bound during the
The main feature on the landscape for the U.S. Treasury
market on Tuesday is the $35 billion auction of five-year
Treasury notes at 1 p.m. (1800 GMT).
Lederer said the auction "should go OK." Buyers will step in
to take advantage of the recent rise in yields, he said.
In addition, "the still vast uncertainties in Washington"
would support the safe-haven bid.
Expectations of low rates into 2015 and more quantitative
easing set to start in January and taking place "in this sector
of the curve in Treasuries" would also support the five-year
auction, he said.
Lederer said downside risks to the five-year Treasury
auction are "apathy in the market" and the rest of the supply
set for sale this week: a $29 billion seven-year Treasury note
auction on Wednesday and Thursday's $14 billion sale of
five-year TIPS (Treasury Inflation-Protected Securities).
With regard to the bond market's potential reaction to
agreement on U.S. fiscal matters, traders said any selloff
related to that could be limited by investors' general appetite
for safe-haven Treasuries as the year draws to an end. That
could allow 10-year yields to ease to the low 1.60 percent area
at the end of 2012, one trader said.
"If there is a compromise, and there is a deal, the market
is going to take that as positive. There will be weakness in
fixed income," the trader said. But he added: "I still think the
market is going to want to be long Treasuries into the end of
The prosepct of accommodative Fed policy for another one to
three years should also restrain any rise in Treasury yields.
Referring to decisions reached at the Fed's most recent
policy meeting, Brett Wander, chief investment officer, fixed
income at Charles Schwab Investment Management, said the Fed had
added more "punch to the bowl" to spike the economy "because the
average American is still thirsty.
"The way they will do this is to increase their purchases of
Treasury securities outright," he noted. "Previously the Fed has
been buying mortgages and then 'Operation Twist' was comprised
of both purchases and sales of Treasury securities. Now they're
just going to do purchases. That, along with the mortgage
purchases, will commence in 2013. So that's a lot of punch."