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TREASURIES-Bond prices climb as U.S. nears 'fiscal cliff'
December 27, 2012 / 9:11 PM / 5 years ago

TREASURIES-Bond prices climb as U.S. nears 'fiscal cliff'

* Senate leader Reid hints U.S. might go over 'fiscal cliff'
    * U.S. fast approaching debt ceiling, Geithner tells
    * January T-bill interest rates briefly turn negative

    By Chris Reese
    NEW YORK, Dec 27 (Reuters) - U.S. Treasury debt prices rose
on Thursday on safe-haven buying after the Senate majority
leader hinted a federal budget deal was unlikely before a
year-end deadline, raising chances of a burdensome package of
tax hikes and spending cuts next year.
    This series of automatic fiscal maneuvers worth $600
billion, commonly referred to as the "fiscal cliff," is set to
phase in after Monday, raising fears of a U.S. recession.
    "It looks like that is where we're headed," Harry Reid, the
Democrat leader of the Senate, said of the likelihood of the
U.S. economy going over the "fiscal cliff." 
    Nervous investors sold stocks and other risky assets and
bought into Treasuries, sending the interest rates on T-bills
for delivery in early January briefly into negative territory in
reaction to Reid's glum assessment.
    "With each passing moment, investors take a step closer to
the reality of a 'no deal' situation, which likely means that
taking risk off the table is the proper action," said Kevin
Giddis, head of fixed income capital markets at Morgan Keegan in
Memphis, Tennessee. "This means that Treasury prices are going
up and equity prices are going down as the risk 'shift' trade
    Treasuries pared price gains, and stocks pulled back from
sharp losses on Thursday afternoon after news the U.S. House of
Representatives will hold a work session on Sunday beginning at
6:30 p.m. EST (2330 GMT), a day before the Dec. 31 deadline for
reaching a deal to avert the "fiscal cliff." 
    However, many analysts said chances have faded that a timely
budget compromise will materialize and said the bond market is
poised for further gains after Reid's pessimistic remarks.
    "That's probable if it looks like we're going over and
there's still no agreement in sight," said Richard Gilhooly,
interest rates strategist at TD Securities in New York.
    Benchmark 10-year notes traded 8/32 higher in
price to yield 1.72 percent, down from 1.75 percent late
Wednesday. Yields dipped to 1.70 percent early on Thursday
afternoon, marking the lowest in nearly two weeks.
    Thirty-year bonds traded 17/32 higher in price
to yield 2.89 percent, down from 2.92 percent late Wednesday.
    Among T-bills, interest rates on issues due in the first
half of January were quoted on Thursday morning at minus 0.25 to
0.50 basis points.
    Trading volume rose from earlier in the week as most
European markets reopened after the Christmas holiday, but it
remained well below average.
    Anxiety about a possible recession if the U.S. goes over the
'fiscal cliff' overshadowed news that jobless claims fell to a
near 4-1/2-year low and November new home sales rose to their
highest since April 2010. Those positive readings were mitigated
by a deterioration in consumer confidence, which fell to its
weakest in four months in December. 
    In addition to being the deadline on the fiscal cliff,
Monday marks the day the federal government is set to reach its
$16.4 trillion debt limit, the Treasury Department said late
    To cut government spending and delay bumping up against the
debt ceiling, the Treasury will suspend issuance of state and
local government series securities -- known as "slugs" --
beginning on Friday, Treasury Secretary Tim Geithner wrote in a
letter to Congressional leaders. 
    The Treasury will take other measures to buy time for the
government to approve a debt ceiling increase.
    This scenario echoed what happened in the summer of 2011
when there was a stalemate between the White House and Congress
on raising the federal debt limit and fears grew over a U.S.
    While Standard & Poor's at the time stripped the U.S. of its
top-notch credit rating, Treasuries prices quickly recovered
from losses after the debt ceiling was raised.

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