December 27, 2012 / 6:30 PM / 5 years ago

CORRECTED-TREASURIES-Bond prices climb as U.S. nears 'fiscal cliff'

6 Min Read

(In fourth paragraph from end, corrects to say that the
scenarion echoed what happened in August 2011, no last August)
    * Senate leader Reid hints U.S. might go over 'fiscal cliff'
    * U.S. fast approaching debt ceiling, Geithner tells
    * Trading volume picks up but still light after Christmas
    * Fed buys $4.61 bln in Treasuries due 2018-2020 for "Twist"
    * January T-bill interest rates turn negative

    By Richard Leong
    NEW YORK, Dec 27 (Reuters) - U.S. Treasury debt prices rose
on Thursday on safe-haven buying after the U.S. Senate majority
leader hinted a federal budget deal was unlikely before a
year-end deadline, raising chances of a burdensome package of
tax hikes and spending cuts next year.
    This series of automatic fiscal maneuvers worth $600
billion, commonly referred to as the "fiscal cliff," is set to
phase in after Monday, raising fears of a U.S. recession.
   "It looks like that is where we're headed," Harry Reid, the
Democrat leader of the Senate, said of the likelihood of the
U.S. economy going over the "fiscal cliff". 
    Nervous investors sold stocks and other risky assets and
piled into Treasuries, sending the interest rates on T-bills for
delivery in early January into negative territory in reaction to
Reid's glum assessment. 
    "That seemed to be the catalyst for the rise in bond prices.
It doesn't take much to spark this thinly-traded market," said
David Keeble, global head of interest rates strategy at Credit
Agricole Corporate & Investment Bank in New York.
    The budget negotiation stalled last week as the White House
and Republicans remained far apart on issues of income tax hikes
and spending cuts to social programs. 
    Some traders earlier had bet that a minor, temporary fix
might still be approved by next Monday as President Barack Obama
and Congress returned from their Christmas vacation. 
    Most analysts said chances have faded that a timely budget
compromise will materialize and the bond market is poised for
further gains after Reid's pessimistic remarks.
    "That's probable if it looks like we're going over and
there's still no agreement in sight," said Richard Gilhooly,
interest rates strategist at TD Securities in New York.
    Despite Tuesday's moves, longer-dated debt prices and the
shape of the yield curve suggested market expectations about the
fiscal cliff have not shifted that much this week.
    Benchmark 10-year notes were 10/32 higher in
price to yield 1.714 percent, down 3.6 basis point from late on
Wednesday. The 10-year yield has fallen more than 13 basis
points since touching an eight-week high last week.
    Thirty-year bonds rose 22/32, erasing an earlier
25/32 loss, to yield 2.885 percent, down 3.8 basis points from
    Among T-bills, interest rates on issues due in the first
half of January were quoted at minus 0.25 to 0.50 basis points.
    Trading volume rose from Tuesday as most European markets
reopened after the Christmas holiday, but it remained well below
    Anxiety about a possible recession if the U.S. goes over the
'fiscal cliff' overshadowed news that jobless claims fell to a
near 4-1/2 year low and November new home sales rose to their
highest since April 2010. Those positive readings were mitigated
by a deterioration in consumer confidence, which fell to its
weakest level in four months. 
    Meanwhile, the Federal Reserve bought $4.614 billion in
notes due 2018-2020, as a part of its Operation Twist, which
involves buying long-term debt and funding the purchases with
sales of short-term notes.
    The Fed will replace the Twist program with outright bond
purchases ranging from five years to 30 years next year.
    In addition to being the deadline on the fiscal cliff,
Monday marks the day the federal government is set to reach its
$16.4 trillion debt limit, the Treasury Department said late on
    To cut government spending and delay bumping up against the
debt ceiling, the Treasury will suspend issuance of state and
local government series securities -- known as "slugs" --
beginning on Friday, Treasury Secretary Tim Geithner wrote in a
letter to Congressional leaders. 
    The Treasury will take other measures to buy time for the
government to approve a debt ceiling increase.
    This scenario echoed what happened in August 2011 when there
was a stalemate between the White House and Congress on raising
the federal debt limit and fears grew about a U.S. default. 
    While Standard & Poor's stripped the U.S. of its top-notch
credit rating, Treasuries prices quickly recovered from losses
after the debt ceiling was raised.
    Credit Agricole's Keeble said Treasury bills due in January
and February are the "perfect thing to buy" in case the Treasury
runs out of options to raise new debt.
    Ironically if the fiscal cliff kicks in and a budget deal is
not quickly reached thereafter, the government would have more
cash on hand to pay its debt because of the spending cuts and
tax increases, Keeble said.

 (Additional reporting by Karen Brettell; Editing by Chizu
Nomiyama and Andrew Hay)

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