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TREASURIES-Prices gain as fiscal fear spurs bond bid
December 5, 2012 / 4:45 PM / 5 years ago

TREASURIES-Prices gain as fiscal fear spurs bond bid

* Republicans says talks with Obama are deadlocked
    * Little reaction to private employment data
    * Fed buys $4.75 bln in debt due 2021-2022

    By Karen Brettell
    NEW YORK, Dec 5 (Reuters) - U.S. Treasuries gained in price
on Wednesday as investors saw a diminishing likelihood that U.S.
lawmakers will stave off a fiscal crunch of spending cuts and
tax hikes scheduled for the new year, which are seen likely to
hurt the economy.
    Republican leaders in the U.S. House of Representatives said
on Wednesday that talks with President Barack Obama to resolve
the fiscal cliff were deadlocked, and they demanded a meeting
with the president to move the negotiations forward.
 
    Bonds accelerated price gains and benchmark 10-year note
yields fell to their lowest levels in two weeks as stocks
declined, adding to the bid for safe-haven debt.
    "It seems to me that without some deal the market is going
to stay bid and there's going to be a reach for yield. I think
the probability of going off the fiscal cliff gets higher by the
day," said Charles Comiskey, head of Treasury trading at the
Bank of Nova Scotia in New York.
    Bonds also gained as the Federal Reserve completed its
latest bond purchases as part of its "Operation Twist" program.
    The Fed bought $4.75 billion in notes due 2021 and 2022 on
Wednesday as part of Operation Twist, which designed to lower
long-term borrowing rates.
    Demand for U.S. government debt was boosted earlier after
Spain failed to meet the maximum target at a debt auction,
raising worries that demand for the euro zone sovereign's bonds
was drying up.
    Many economists expect Spain to eventually seek a bailout
from its euro zone partners to cover for a jump in financing
needs next year.
    Bonds were little moved after private payrolls processor ADP
said U.S. private-sector employers added 118,000 jobs in
November, just shy of economists' expectations.
    Investors are now awaiting the release on Friday of
government's more comprehensive monthly payrolls report for
November, which is expected to show that employers added 171,000
jobs in the month, according to the median estimate of 92
economists polled by Reuters.
    Reaction to Friday's data, however, may be limited as
traders question the accuracy of the number, which is expected
to be swayed by the effects of Superstorm Sandy on heavily
populated states on the U.S. East Coast.
    "I think the data right now is ancillary. There is going to
be so much noise around unemployment as a result of Sandy," said
Scott Graham, head of U.S. government bond trading at BMO
Capital Markets in Chicago.
    Next week's Federal Reserve policy meeting is also coming
into view, with expectations that the Fed will announce a new
round of quantitative easing.
    "Everybody expects the Fed to announce they will continue
Treasury purchases next year," after Operation Twist is due to
expire, said Suvrat Prakash, interest rate strategist at BNP
Paribas in New York.
    Declining supply of longer-dated debt may lead the Fed to
extend purchases to shorter-dated maturities than the current
purchases of seven-year, 10-year and 30-year bonds.
    "Are they going to have to go to the five-year sector in
addition to the back-end? If you look at supply, they have kind
of run out of room to buy the 10-year," said BMO's Graham.
    Benchmark 10-year notes were last up 8/32 in
price to yield 1.58 percent, down from 1.61 percent late on
Tuesday.
    Thirty-year bonds gained 11/32 in price to yield
2.76 percent, down from 2.78 percent on Tuesday.

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