December 21, 2012 / 7:56 PM / in 5 years

TREASURIES-Bonds gain safety bid after Boehner tax plan fails

* Bond prices gain on renewed concern over "fiscal cliff"
    * Yield curve flattens as Fed buys $1.89 billion in long
    * Volumes likely to drop as Christmas holiday, year-end

    By Karen Brettell
    NEW YORK, Dec 21 (Reuters) - U.S. Treasuries gained a safety
bid on Friday after House of Representatives Speak John Boehner
failed to gain support for a tax plan, hurting stocks on
concerns that lawmakers will be unable to reach a deal to avert
the "fiscal cliff."
    The failure cast fresh uncertainty over talks to avoid
roughly $600 billion in across-the-board tax hikes and automatic
government spending cuts due to begin in January that could push
the U.S. economy back into recession in 2013. 
    The negotiations are expected to continue to dominate
markets in the coming weeks, while trading volumes are expected
to fall with the market closed next Tuesday for the Christmas
holiday and as investors close books for year-end.
    "It's going to be all about whether things are being
negotiated or not, what are the probabilities of us going over
the cliff, are they getting worse or are they getting better,"
said Rick Klingman, a Treasuries trader at BNP Paribas in New
    Treasuries yields have fallen from two-month highs on
Tuesday as doubts that lawmakers will reach a compromise
    "Overall the 'risk on' mood from the last couple of weeks,
with the thought process that something will get done in
Washington, is being unwound a little bit," Klingman said.
    That trend may continue until there are fresh signs that a
deal is more likely.
    The latest development "suggests the path of least
resistance for stock prices and yields is going to be lower
until it becomes clear that there really is a
common-denominator-deal that can pass," said Robert Tipp, chief
investment strategist with Prudential Fixed Income in Newark,
New Jersey, which has about $350 billion in assets under
    The Treasuries yield curve also flattened on Friday as the
Federal Reserve bought $1.89 billion in debt due from 2036 to
2042 as part of its Operation Twist program, designed to lower
long-term borrowing rates.
    The yield gap between 30-year bonds and five-year notes
narrowed to 218 basis points on Friday, the tightest in around
three weeks.
    The Fed will buy additional bonds next Thursday and Friday
as part of the operation, including up to $5.25 billion in notes
due 2018 and 2020 on Thursday and up to $5.25 billion in notes
due 2021-2022 on Friday.
    Benchmark 10-year notes were last up 13/32 in
price to yield 1.76 percent, down from 1.80 percent late on
Thursday. The yields have fallen from as high as 1.85 percent on
    Thirty-year bonds gained 1-3/32 in price to
yield 2.93 percent, down from 2.98 percent late on Thursday.

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