February 28, 2013 / 11:56 AM / 5 years ago

TREASURIES-U.S. bonds firm in Europe on spending cut concerns

LONDON, Feb 28 (Reuters) - U.S. Treasuries rose in Europe on Thursday, as concern that politicians will struggle to reach a deal to stop growth-crimping spending cuts from kicking in from Friday prompted demand for low risk debt.

President Barack Obama and Republican congressional leaders have yet to reach a deal to avert the $85 billion worth of spending cuts known as the ‘sequester” which economists say will hurt the economy.

The looming deadline offset a positive backdrop for equities after Federal Reserve Chairman Ben Bernanke reassured markets its bond purchases would continue.

“Bernanke let the markets know that the Fed will continue its stimulus for a while, which was a relief for stocks and undermined some demand for bonds, but it’s hard to sell bonds with the ‘sequester’ issue unresolved,” said a fixed-income fund manager at a Japanese asset management firm.

The benchmark 10-year T-note was last 6/32 up in price to yield 1.88 percent, 2 basis points less than in late U.S. trade on Wednesday while the 30-year T-bond price was 11/32 higher in price to yield 3.08 percent.

“Treasuries are better bid today. We’re seeing buying on dips but ultimately I think they might reach a last minute deal (to avert the spending cuts),” one London-based trader said.

Some strategists disagree, seeing protracted negotiations with the uncertainty expected to keep intact demand for low risk government debt.

“In our opinion, the market is displaying a degree of complacency in this regard,” Lloyds strategists said in a note.

“Although the immediate sequestration effects may well not impact too greatly, the fact that the GOP seems unlikely to shift its stance over the foreseeable future implies a potentially protracted period of political impasse.”

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