December 5, 2012 / 8:51 PM / 5 years ago

TREASURIES-US debt prices firm on fiscal cliff concerns

* Little reaction to U.S. private employment data
    * Fed buys $4.75 bln in debt due 2021-22
    * Republicans say fiscal cliff talks with Obama deadlocked

    By Ellen Freilich
    NEW YORK, Dec 5 (Reuters) - U.S. Treasuries prices rose on
Wednesday with observers citing concern that U.S. lawmakers
might not avoid a set of spending cuts and tax hikes set for the
new year that would likely damp economic growth.
    However, stocks were said to be up at least partly on the
view a deal would be reached to mitigate that danger.
    "Stocks seem to be reacting positively due to the feeling a 
'fiscal cliff' deal gets done soon," said Tom DiGaloma, managing
director at Navigate Advisors LLC, a broker-dealer in Stamford,
Connecticut. "However, (in bonds) we are still of the view that
a deal won't get done until the end of year at the earliest, or
possibly by early next year."
    Republican leaders in the U.S. House of Representatives said
on Wednesday that talks with President Barack Obama to resolve
the fiscal cliff were deadlocked. 
    That left bonds trading "sideways" at slightly higher
levels, with some accounts selling 10- and 30-year Treasuries
and buying five-year notes instead to make room for 10s and 30s
to be auctioned next week, DiGaloma said.
    Bonds accelerated price gains and benchmark 10-year note
yields fell to their lowest levels in two weeks.
    "Without some deal, the (bond) market is going to stay bid
and there's going to be a reach for yield," said Charles
Comiskey, head of Treasury trading at the Bank of Nova Scotia in
New York.
    Bonds also gained as the Federal Reserve completed its
latest bond purchases as part of its "Operation Twist" program.
    The Fed bought $4.75 billion in notes due 2021 and 2022 on
Wednesday as part of Operation Twist, which is designed to lower
long-term borrowing rates.
    Demand for U.S. government debt also got a boost when Spain
failed to meet the maximum target at a debt auction, raising
concern that demand for euro zone sovereign bonds was waning.
    Many economists believe Spain will eventually seek a bailout
from its euro zone partners.
    Bonds were little moved after private payrolls processor ADP
said U.S. private-sector employers added 118,000 jobs in
November, just shy of economists' expectations.
    They were also largely unaffected by the stronger than
expected data from the Institute for Supply Management's report
on services sector activity, said John Canavan, fixed income
analyst at Stone & McCarthy Research Associates in Princeton,
New Jersey.
    "With Friday's U.S. employment report, next week's FOMC
(monetary policy) meeting, and the fiscal cliff negotiations all
ahead, players just weren't willing to make any commitments in
response to the ISM data," he said.
    Investors are now awaiting the release on Friday of the
government's more comprehensive monthly payrolls report for
November, which is expected to show that employers added 93,000
jobs in the month, according to the median estimate of 92
economists polled by Reuters.
    Reaction to Friday's data, however, may be limited as
traders question the accuracy of the number, which is expected
to be swayed by the effects of superstorm Sandy on heavily
populated states on the U.S. East Coast.
    "We expect the labor market to remain soft and probably
somewhat distorted by the effects of the hurricane," said
Tanweer Akram, senior economist at ING U.S. Investment
Management in Atlanta, Georgia. "We don't expect strong job
growth - probably in the range of 50,000 to 100,000 - not enough
to lead to a lower unemployment rate."
    Next week's Federal Reserve policy meeting is also coming
into view, with expectations that the Fed will announce a new
round of quantitative easing.
    "Everybody expects the Fed to announce they will continue
Treasury purchases next year," after Operation Twist is due to
expire, said Suvrat Prakash, interest rate strategist at BNP
Paribas in New York.
    Declining supply of longer-dated debt may lead the Fed to
extend purchases to shorter-dated maturities than the current
purchases of seven-year, 10-year and 30-year bonds.
    "Are they going to have to go to the five-year sector? If
you look at supply, they have kind of run out of room to buy the
10-year," said BMO's Graham.
    Benchmark 10-year notes were last up 3/32 in
price to yield 1.59 percent, down from 1.61 percent late on
    Thirty-year bonds slipped 3/32 in price, leaving
their yield at 2.78 percent.

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