November 26, 2012 / 5:21 PM / in 5 years

TREASURIES-Prices gain as fiscal worries, Spain drive safety bid

* Optimism tempered on avoiding US fiscal crisis
    * Greece, Catalonia support safe-haven buying of US debt
    * Fed set for six Treasuries buybacks this week

    By Ellen Freilich
    NEW YORK, Nov 26 (Reuters) - U.S. Treasury prices rose on
Monday as fiscal challenges in the United States and political
uncertainty in Spain fed investors' appetite for safe-haven
    The gains followed losses last week in thin holiday trading
after signs a deal might be reached to avert the "fiscal cliff"
of spending cuts and tax increases -- due to take effect in
early 2013 -- allowed the safety bid to dwindle.
    However, by Monday the optimism on the fiscal cliff talks
seemed more tempered, although gains in Treasuries could still
be limited by the conviction that if the so-called fiscal cliff
can be avoided, U.S. economic growth will safely outpace that of
the euro zone and Japan in 2013.  
    "Reports of very little compromise over recent discussions
on the 'fiscal cliff' are driving rates lower," said Tom di
Galoma, managing director at Navigate Advisors LLC in Stamford,
    Safe-haven buying also occurred as the European Union "is
still sorting out Greece, and Catalonia takes steps towards
independence from Spain," he said.
    Separatists in Catalonia won a large majority in regional
elections. A deep recession and high unemployment have fueled
the separatist mood in Catalonia, which represents a fifth of
Spain's economy, piling political uncertainty on top of Prime
Minister Mariano Rajoy's economic problems. 
    Euro zone finance ministers and the International Monetary
Fund are also seeking to unfreeze the second bailout package for
Greece on Monday, but they will first need to agree on whether
some of the official loans to Athens might eventually be
forgiven to cut Greek debt. 
    Benchmark 10-year Treasury notes were trading
15/32 higher in price, with their yield dipping to 1.64 percent
from 1.69 percent on Friday, while 30-year bonds 
gained 1-3/32 in price with their yield falling to 2.77 percent
from 2.83 percent.
    Bond prices rose even though the market faces $99 billion of
supply this week. The U.S. Treasury Department will sell $35
billion of two-year notes on Tuesday, $35 billion
of five-year notes on Wednesday and $29 billion
of seven-year notes on Thursday.
    The Federal Reserve will be a large buyer of Treasuries this
week, with six purchases as part of its "Operation Twist"
stimulus program, under which it is selling shorter-dated U.S.
government debt and using the proceeds to buy longer-dated debt.
    In the first of such purchases this week , the Fed on Monday
bought $1.855 billion of Treasuries maturing February 2036
through November 2042. 
    "The Federal Reserve has scheduled six purchases in
long-term Treasuries to take place over the next five days,"
said  Jake Lowery, portfolio manager on the global rates team at
ING Investment Management in Atlanta, with $170 billion in
assets under management. "Those purchases, combined with demand
for bonds coming from political uncertainty in the U.S. and
Europe, are driving the rally."
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