November 9, 2012 / 8:01 PM / in 5 years

TREASURIES-Bonds choppy as fiscal cliff uncertainty prevails

By Luciana Lopez and Ellen Freilich

NEW YORK, Nov 9 (Reuters) - U.S. Treasuries saw choppy trading on Friday, with the long end of the curve advancing even as other maturities slipped, as investors remained wary of the approaching “fiscal cliff” despite words of compromise by President Barack Obama.

In his first formal address since his re-election on Tuesday, Obama invited congressional leaders to the White House to start negotiating a deal to avert the package of automatic tax hikes and spending cuts set to kick in at the start of the year.

Obama’s invitation came just hours after John Boehner, the Republican Speaker of the House, said raising tax rates on the wealthy would slow U.S. job creation. But he also talked about eliminating loopholes in the U.S. tax code.

“The market is trying to understand what the backdrop is going to look like in the weeks and months and quarters ahead,” said Tom Porcelli, chief U.S. economist at RBC Capital Markets in New York.

“Both sides have made it sound as if they’re willing to work with one another. But again, the devil’s in the details.”

U.S. stocks also cut gains after Obama’s remarks.

Thirty-year bonds rose 10/32 to yield 2.762 percent, from 2.777 percent on Thursday. Those bonds are on track for the biggest weekly fall in yield since the final week of May.

U.S. 10-year notes pared early losses after Obama spoke, briefly trading flat before more recently trading down 01/32 to yield 1.620 percent, from 1.618 percent on Thursday.

Traders also noted that current bond market yields are about where they were when a rally stalled in late August and early September.

“It might be difficult to escape this range,” said ING trader Jake Lowery, Treasury trader at ING Investment Management in Atlanta, with $170 billion in assets under management.

Markets are focused on what would happen to the economy if and when U.S. federal spending cuts roll in and the Bush-era tax cuts roll off next year, as would be the case if no agreement is reached to avert the so-called “fiscal cliff” designed to force a reduction in the U.S. federal budget deficit.

The non-partisan Congressional Budget office has said such an abrupt fiscal tightening could put the economy back into recession and boost the unemployment rate to 9 percent.

Such a scenario would be supportive for bond prices.

Concerns about the euro zone economy also constrained selling of U.S. debt.

Growth in Germany, Europe’s largest economy, is likely to slow in the fourth quarter and the first three months of 2013.

Industrial production in France, the euro zone’s second-largest economy, shrank in October and the country’s central bank said it expected to slip into recession at the end of 2012.

Meanwhile, Greece’s government must vote on Sunday on its 2013 budget to get access to international aid after Wednesday’s tight vote favoring an austerity package totaling 13.5 billion euros. And whether Spain would apply for financial aid was also uncertain. Spain has so far resisted asking for aid.

Data early in the session showed U.S. consumer sentiment rose to its highest level in more than five years in November as Americans felt more optimistic about employment prospects and the outlook for the economy.

That helped curb appetite for safe-haven U.S. debt earlier in the day, although the data’s effects faded as worries about the fiscal cliff came to the fore.

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