December 14, 2012 / 9:21 PM / 5 years ago

TREASURIES-Prices rise as tame inflation supports Fed policy

* Fall in November CPI points to benign inflation
    * Yields rise on the week under supply pressure
    * U.S. fiscal crisis fears support Treasuries prices

    By Chris Reese and Luciana Lopez
    NEW YORK, Dec 14 (Reuters) - U.S. Treasuries prices gained
on Friday on tame inflation data likely to help the Fed keep
interest rates near zero, but supply pressures and worries about
Washington's budget fight kept prices lower for the week
overall.
    U.S. consumer prices fell in November for the first time in
six months, with the Labor Department's Consumer Price Index off
0.3 percent on a sharp fall in gasoline prices. 
    "The crux of this report is simply that the inflationary
backdrop remains very benign, providing the Fed with
considerable breathing room to keep monetary policy
accommodative," said Millan Mulraine, a senior economist at TD
Securities in New York.
    The Federal Reserve said earlier this week it will weigh
inflation expectations in deciding when or if to raise rates.
    "Most of these forecasts, however, are heavily influenced by
actual inflation," said Chris Rupkey, chief financial economist
at Bank of Tokyo-Mitsubishi UFJ in New York.    
    The subdued inflation data and the outlook for easy monetary
policy supported the case for lower rates, and benchmark 10-year
notes rose 8/32 in price to yield 1.704 percent,
down from 1.73 percent late Thursday. Thirty-year bonds
 were 27/32 higher to yield 2.863 percent, down from
2.90 percent.
    Nevertheless, benchmark yields have risen around eight basis
points on the week on supply pressure and uncertainty about both
the long-term implications of recent Fed moves and talks in
Washington to avert abrupt fiscal tightening next year.
    The Treasury sold $66 billion of U.S. government debt this
week and next week it will offer two-, five-and seven-year notes
as well as five-year Treasury Inflation-Protected Securities.
    Investors are also still mulling the Fed's moves on
Wednesday. The U.S. central bank announced a new round of
monetary stimulus and took the unprecedented step of indicating
interest rates would remain near zero until unemployment falls
to at least 6.5 percent and longer-term inflation projections
remain below 2.5 percent. 
    Budget squabbles in Washington helped burnish U.S. debt's
safe-haven appeal as well. 
    Talks between President Barack Obama and U.S. House of
Representatives Speaker John Boehner over avoiding an automatic
package of steep tax hikes and budget cuts next year have
apparently stalled.
    Analysts said on Friday it was increasingly likely that
Washington won't be able to reach a deal before the Jan. 1
deadline on the "fiscal cliff." 
    With a deal between Democrats and Republicans looking
increasingly unlikely before the end of the year, Treasuries
prices are likely to continue to be supported by safe-haven
interest, said Mary Ann Hurley, vice president of fixed income
trading at D.A. Davidson & Co in Seattle.
    "Even if they do a partial down-payment with some type of
budget cuts, that is going to be negative for the economy, which
is good for bonds," Hurley said.

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