Treasury Yields in Tightest Range in 2 Weeks as Deadline Looms

Treasury 10-year note yields traded in the narrowest range in two weeks as the year-end deadline approached in a budget-deficit showdown that may push the world’s biggest economy into recession.

Bonds slipped for the first time in four days amid speculation President Barack Obama and Republicans may reach an agreement to avert more than $600 billion in automatic tax boosts and spending cuts set to begin in January. Treasuries fell for three straight weeks this month as lawmakers worked to end the stalemate. House Speaker John Boehner scrapped a plan last week to allow higher tax rates on income above $1 million, and lawmakers left Washington for the Christmas holiday.

“A lot of participants are trying to avoid having much to do at the end of the year because of fiscal-cliff worries,” said David Coard, head of fixed-income trading in New York at Williams Capital Group, a brokerage for institutional investors. “This seems to be an even quieter Christmas week than usual.”

Benchmark 10-year note yields increased one basis point, or 0.01 percentage point, to 1.77 percent at 2 p.m. New York time. They advanced earlier as much as three basis points to 1.79 percent. The price of the 1.625 percent security due in November 2022 declined 3/32, or 94 cents per $1,000 face amount, to 98 21/32, according to Bloomberg Bond Trader prices.

The yields traded in a 3.05 basis-point range, the tightest since Dec. 10.

The 30-year bond yield was little changed at 2.94 percent after rising one basis point earlier.

Holiday Schedule

Trading in Treasuries ended at 2 p.m. New York time and will stay closed Dec. 25 for Christmas, according to the website of the Securities Industry and Financial Markets Association.

Treasury volume reported by ICAP Plc, the largest inter- dealer broker of U.S. government debt, was $32 billion for the partial day. It was the lowest for any trading day since March 2009. The average full-day volume this year is $240 billion.

U.S. government securities have returned 2.1 percent this year on an annualized basis, set for the worst performance since a 3.7 percent loss in 2009, according to Bank of America Merrill Lynch Indexes. The Standard & Poor’s 500 Index (SPX) of U.S. shares has returned 16 percent on a similar basis, including reinvested dividends, amid signs the U.S. economy is improving.

Treasuries have lost 0.2 percent this quarter and 0.6 percent in December, Merrill Lynch index data show.

The Senate will reconvene on Dec. 27 to discuss ways to avoid the automatic austerity measures. The Congressional Budget Office has said the spending reductions and tax increases may cause a recession next year.

Market Driver

“The fiscal cliff is the driver of the market, and the assumption is that something will get done,” said Jason Rogan, director of U.S. government trading at Guggenheim Partners LLC, a New York-based brokerage for institutional investors. “They may get certain parts of the fiscal issue taken care of, and then they may kick the can down the road.”

In the aftermath of Boehner’s failure to garner House Republican support from his caucus for “Plan B,” which would have extended tax cuts on incomes below $1 million, Senator Joseph Lieberman said Senate leaders now must take charge of resolving the budget stalemate.

Senate Majority Leader Harry Reid, a Nevada Democrat, and Minority Leader Mitch McConnell, a Kentucky Republican, “have the ability to put this together again and pass something,” Lieberman, a retiring Connecticut independent, said yesterday on CNN’s “State of the Union” program.

Odds Increase

“As we get closer to the end of the year, the odds that we are going to go off the fiscal cliff increase,” Adrian Miller, director of fixed-income strategies at GMP Securities LLC in New York, said in a telephone interview. “No one is making any big moves at this point. The market direction is in the hands of policy makers.”

The world’s biggest bond dealers are growing more reluctant to give up their record holdings of Treasuries, providing support for a rally in the world’s most-liquid debt market that is entering its fourth year.

Goldman Sachs Group Inc., JPMorgan Chase & Co. and the rest of the 21 primary dealers of U.S. government securities have reduced the amount of bonds they offered to the Fed to average of $8.04 billion a day in the past two weeks, from the $11.6 billion in September 2011, when the central bank began its Operation Twist stimulus program, according to data compiled by Bloomberg. At the same time, Wall Street’s holdings of Treasuries more than doubled since March.

“The market continues to be held hostage by politics and the economic numbers aren’t that strong,” Matthew Duch, a fund manager in Bethesda, Maryland, at Calvert Investments, which oversees more than $12 billion in assets, said in a telephone interview Dec. 20. “In this environment, where you have fewer and fewer options, you have to align yourself with what the Fed is doing. You can’t afford not to.”

To contact the reporters on this story: Susanne Walker in New York at swalker33@bloomberg.net; Cordell Eddings in New York at ceddings@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

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