Treasuries Head for Lowest Average Annual Yield on Record

Treasuries rose, pushing 10-year yields toward the lowest average annual yield on record, as U.S. leaders prepared to resume talks on a budget stalemate that may push the world’s biggest economy into recession.

Bonds extended gains after Treasury Secretary Timothy F. Geithner said he’ll take measures to postpone a U.S. default when the statutory debt limit is reached Dec. 31. President Barack Obama plans to return to Washington tomorrow from a holiday vacation as a year-end deadline looms to avert more than $600 billion in automatic tax increases and spending cuts.

“We’re coming to the edge of the cliff, and time is running out,” said Larry Milstein, managing director in New York of government-debt trading at R.W. Pressprich & Co. “We’ve seen Treasuries start to grind higher over the last week or so. If it really starts to look into the first week of January that these guys aren’t moving, either side, and we’re really not making any progress, then I can certainly see a significant move in Treasuries.”

Benchmark U.S. 10-year yields fell two basis points, or 0.02 percentage point, to 1.75 percent at 5 p.m. in New York, according to Bloomberg Bond Trader prices. They have averaged 1.79 percent this year, the lowest on record. The price of the 1.625 percent security maturing in November 2022 increased 6/32, or $1.88 per $1,000 face value, to 98 27/32.

The 10-year yield has climbed from the record low of 1.38 percent reached in July. It compares with the average of 3.66 percent for the past decade.

Yield Curve

Two-year Treasuries yielded 0.27 percent, and 30-year bond yields declined two basis points to 2.92 percent.

About $84 billion of Treasuries changed hands today, according to ICAP Plc, the largest inter-dealer broker of U.S. government debt. The daily average this year is $239 billion.

The yield difference between U.S. 10- and two-year notes shrank to the least in almost two weeks even after data showed home prices climbed in October by the most since 2010. It was 1.49 percentage points, the narrowest on a closing basis since Dec. 14.

The yield gap, called a yield curve, plots the rates of bonds of the same quality but different maturities. It steepens when yields on shorter-maturity notes fall, those on longer-term bonds rise, or both. The gap typically narrows when investors anticipate slower economic activity and demand less compensation on expectations of limited inflation.

Trading in Treasuries was closed in Japan and stayed shut in the U.K. for Boxing Day, according to the Securities Industry and Financial Markets Association. It took place as usual in New York after being shut yesterday around the world for Christmas, according to the website.

Five Days

Congress will return to session tomorrow with five days before the budget-agreement deadline under the terms of the August 2011 accord that raised the U.S. debt ceiling.

The Congressional Budget Office has said the automatic tax boosts and spending reductions may cause a recession next year.

House Speaker John Boehner, an Ohio Republican, and Obama have been unable to agree on the tax-rate increase on top earners Obama wants or the cuts to entitlement programs that Boehner seeks. The two haven’t spoken since the president flew to Hawaii on Dec. 21, according to a Republican aide who requested anonymity when discussing the negotiations.

“People are certainly concerned about the fiscal cliff,” said Guy Haselmann, an interest-rate strategist in New York at Bank of Nova Scotia, one of the 21 primary dealers that trade with the Fed. “Even if there is a deal, what does a deal mean, and how watered down is it going to be? We’re going to make all the hard decisions next year, so uncertainty just hangs over the marketplace.”

Debt Limit

Geithner, in a letter to congressional leaders, said the Treasury will take “extraordinary measures” to create about $200 billion in headroom under the debt limit, he wrote. While usually that would last about two months, there’s “significant uncertainty” because of unresolved tax and spending policies, he said.

“They’re right to make it an issue now,” said Aaron Kohli, an interest-rate strategist in New York at the primary dealer BNP Paribas SA. “Given intransigence over the fiscal cliff, it bothers me that they don’t have more progress on the debt ceiling, too, because that’s not that far behind.”

Treasuries have returned 2 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 of U.S. shares has returned 15 percent on a similar basis, including reinvested dividends, amid signs the U.S. economy is improving.

U.S. government securities have lost 0.3 percent this quarter and 0.7 percent this month, Merrill Lynch data show.

‘Relatively Stable’

“Longer-term interest rates have the potential to rise,” Tony Crescenzi, a portfolio manager and strategist at Pacific Investment Management Co. in Newport Beach, California, said in a television interview on “Bloomberg Surveillance” with Michael McKee and Sara Eisen. “One wants to avoid issues or underweight issues over 10 years in maturity.”

In the short term, yields will be “relatively stable,” he said, even as the inability of fiscal policy makers to bridge differences in the budget talks is draining confidence from the economy, Crescenzi said.

The Fed plans to buy as much as $5.25 billion of Treasuries tomorrow maturing from December 2018 to November 2020, according to the New York Fed’s website. The operation is part of the Operation Twist program, under which the central bank replaces shorter-maturity notes in its holdings with longer-dated debt. The program is scheduled to expire at year-end.

The S&P/Case-Shiller index of property values in 20 U.S. cities increased 4.3 percent from October 2011, the biggest 12- month advance since May 2010, the group said today in New York. The median forecast of 30 economists in a Bloomberg survey projected a 4 percent gain.

To contact the reporters on this story: Daniel Kruger in New York at dkruger1@bloomberg.net; John Detrixhe in New York at jdetrixhe1@bloomberg.net

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

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