* Benchmark 10-year note yields lowest in two weeks
* Fiscal, economic fears seen boosting Treasuries
* Fed will buy up to $5.25 bln in notes due 2021-2022
By Karen Brettell
NEW YORK, Dec 28 U.S. benchmark Treasuries
yields dropped to their lowest levels in two weeks on Friday as
concerns that the economy would be harmed by tax hikes and
spending cuts and a fall in consumer confidence spurred demand
for safe haven bonds.
Investors are focused on Washington as President Barack
Obama and lawmakers launch a last-chance round of budget
negotiations days before a New Year's deadline to reach a deal
or watch the economy go off a "fiscal cliff."
Window-dressing for year-end and month-end extension buying
also boosted demand for Treasuries on the second last trading
day of 2012.
"I think the most likely scenario is that we will probably
go over the cliff, there is a lot of posturing on both sides,"
said John Fath, managing partner at BTG Pactual in New York.
Political bickering in Washington is making investors lose
faith that lawmakers will reach substantive consensus on how to
reduce the U.S. deficit, with the most likely outcome that they
will agree on smaller issues in early January and then extend
negotiations on larger issues to later in 2013.
Treasuries have benefited from uncertainty over the outcome
of the negotiations, and yields have been held down as investors
worry that a fall in confidence will harm the economy, which
would keep rates low.
Benchmark 10-year notes rose 8/32 in price on
Friday, with yields falling to 1.71 percent, down from 1.73
percent on Thursday and from a two-month high of 1.85 percent a
week and a half ago.
Thirty-year bonds rose 18/32 in price to yield 2.88 percent,
down from 2.90 percent on Thursday and the lowest since Dec. 17.
An agreement to avoid a fiscal crunch, and boost the
country's debt ceiling, would likely benefit riskier assets and
send Treasuries yields higher, though some investors question
how long a stocks rally and Treasuries selloff would last if the
deal lacks a long-term plan for the deficit.
The risk of further negative actions on the U.S. credit
rating is also weighing on the market.
Treasuries rallied when Standard & Poor's cut the U.S.
credit rating to the second highest investment grade in August
2011, though investors have said there's no certainty the market
will react the same way a second time.
"The kneejerk reaction is that there could be a move to
flight-to-quality," said Fath. Longer term, "there might be a
bit of an illusion in the marketplace, particularly with
lawmakers, that it will have no effect or bearing on rates, but
at some point it will."
Fitch Ratings and Moody's Investors Service both rate the
U.S. the top triple-A and all three major rating agencies have a
negative outlook on the country.
The Federal Reserve will buy up to $5.25 billion in notes
due in 2021 and 2022 on Friday in its final buyback as part of
its Operation Twist program, in which it buys long-term notes
and funds the purchases with sales of short-term notes.
The central bank will replace that operation next year with
outright purchases of Treasuries from 5-years to 30-years as it
seeks to boost spending and economic growth.