December 26, 2012 / 8:20 PM / in 5 years

TREASURIES-Prices gain as U.S. fiscal deadline approaches

* Bonds gain safety bid as deadline for fiscal crunch
    * Hopes fading on a timely deal on U.S. government budget
    * Trading desks lightly staffed, volume tepid after
    * Fed will buy up to $5.25 bln in notes due 2018-2020 on

    By Karen Brettell
    NEW YORK, Dec 26 (Reuters) - U.S. Treasuries gained in price
on Wednesday in light, post-Christmas trading, on chances of new
volatility over fears about tax increases and spending cuts due
to kick in as early as next week.
    A package of automatic federal tax hikes and spending cuts
worth $600 billion are set to go into effect in 2013 unless
lawmakers in Washington are able to compromise to avert the
fiscal crunch, which threatens to harm economic growth.
    Concern over the impact of this so-called fiscal cliff may
increase market volatility as we head into the weekend,
potentially harming stocks and benefiting the U.S. dollar and
safe haven assets including Treasuries.
    "The rhetoric will start to heat up as we get closer to the
weekend," said Bricklin Dwyer, an economist at BNP Paribas in
New York. 
    Markets may get more volatile heading into Monday's deadline
if a deal looks increasingly unlikely. "Those that are
blindsided are going to be hit hard," said Dwyer.
    The U.S. bond market was closed on Tuesday for Christmas and
most major markets in Europe remained closed on Wednesday, which
kept volumes low, at around 70 percent below their average,
according to broker ICAP.
    President Barack Obama is due back in Washington early
Thursday for a final effort to negotiate a deal with Congress to
avert or at least postpone the fiscal cliff. 
    Traders have turned glum that even a temporary fix will be
attained by Monday.
    "The market seemed resigned that they might not get a grand
bargain done before the end of the year. The best it can hope
for is a 'kick the can down road' kind of deal so they could
pick it up again early next year," said Larry Milstein, head of
government and agency trading at R.W. Pressprich & Co. in New
    The end of Bush era tax cuts and reductions in government
spending are expected to dampen consumer spending and harm
consumer confidence.
    Rating agencies may also act on the U.S.' credit rating if
negotiations drag on past the year-end deadline. Fitch Ratings
and Moody's Investors Service currently rate the U.S. the top
triple-A, while Standard & Poor's rank the country the second
highest investment grade and all three agencies have negative
outlooks on the country.
    The failure of lawmakers to agree to a deal may harm
confidence from "just the discomfort of realizing that congress
just won't do what's necessary when it's necessary," said BNP's
    Benchmark 10-year notes were last up 5/32 in
price to yield 1.76 percent, down from 1.78 percent on Monday.
The yields have dropped from 1.85 percent a week ago. 
    Thirty-year bonds rose 8/32 in price to yield
2.93 percent, down from 2.94 percent on Monday.
    The U.S. debt ceiling may again come into focus if
negotiations drag through next year. BNP anticipates that the
Treasury can stay under the ceiling until late February or early
March through measures that include suspending investments in
off-balance sheet vehicles including a government employee
pension fund known as the G-fund and the exchange stabilization
    If no deal is reached by then, however, the country will
again face the prospect of needing to raise the debt ceiling, or
risk a catastrophic default on its debt.
    Data on Wednesday also suggested U.S. Christmas shopping
grew less than 1 percent from a year ago, which could be the
worst year-end retail season since 2008. Economists blamed the
disappointing sales on anxiety among Americans about their jobs
and taxes next year if politicians fail to reach a timely budget
    The Fed will buy bonds on Thursday and Friday as part of its
Operation Twist program, which involves buying long-term debt
and funding the purchases with sales of short-term notes.
    It will buy up to $5.25 billion in notes due 2018-2020 on
Thursday and up to $5.25 billion in notes due 2021-2022 on
Friday as part of Twist.
    The Fed will replace this program with outright bond
purchases ranging from five-years to-30 years next year.
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