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Treasuries Rise a Third Day Amid Pessimism on Cliff

Photographer: Sam Hodgson/Bloomberg

Purchases of new houses rose last month to the highest level since April 2010. Close

Purchases of new houses rose last month to the highest level since April 2010.

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Photographer: Sam Hodgson/Bloomberg

Purchases of new houses rose last month to the highest level since April 2010.

Treasuries rose for a third day amid speculation U.S. lawmakers will struggle to reach agreement in time to avoid the so-called fiscal cliff of more than $600 billion in automatic spending cuts and tax increases.

Ten-year notes gained for the first week in a month, pushing the yield below its 200-day moving average of 1.74 percent, as congressional leaders met with President Barack Obama to discuss the stalemate while the year-end deadline approached. The Federal Reserve bought $5 billion of Treasuries in the last purchase under its Operation Twist stimulus program.

“The market is listening to the rhetoric,” said Scott Sherman, an interest-rate strategist in New York at Credit Suisse Group AG, one of 21 primary dealers that trade with the Fed. “The closer you get to the edge, the more you almost have to assume the odds are getting worse. That said, the incentives for policy makers are still to get something done and to announce it at the last possible moment.”

The benchmark 10-year yield slid four basis points, or 0.04 percentage point, to 1.7 percent at 5 p.m. in New York, according to Bloomberg Bond Trader prices. It touched 1.69 percent, the lowest level since Dec. 13. The price of the 1.625 percent security due in November 2022 rose 10/32, or $3.13 per $1,000 face amount, to 99 10/32. The yield lost six basis points this week.

Yields on 30-year bonds decreased four basis points today and six basis points this week to 2.87 percent.

One-month bill rates fell below zero, dropping to the lowest level since December 2008. They touched negative 0.0456 percent before ending the day at zero.

Previous Bets

The long-bond yields reached a three-month high of 3.03 percent on Dec. 18, and 10-year yields touched a seven-week high of 1.85 percent, on bets the stalemate would be resolved.

Hedge-fund managers and other large speculators decreased their net-long position in five-year note futures in the week ending Dec. 25 to the lowest level since May 2010, according to U.S. Commodity Futures Trading Commission data.

Speculative long positions, or bets prices will rise, outnumbered short positions by 9,329 contracts on the Chicago Board of Trade. Net-long positions fell by 56,678 contracts, or 86 percent, from a week earlier, the Washington-based commission said in its Commitments of Traders report.

U.S. government securities returned 2.3 percent in 2012 on an annualized basis through yesterday, 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 gained 16 percent, including reinvested dividends, amid signs the U.S. economy is improving.

Bonds gained less than 0.1 percent this quarter and lost 0.4 percent this month, Merrill Lynch index data show.

Vote Sought

Obama, who had been negotiating one-on-one with House Speaker John Boehner, met with Republicans Boehner and Senate Minority Leader Mitch McConnell, as well as Senate Majority Leader Harry Reid and House Minority Leader Nancy Pelosi, both Democrats.

The president sought an up-or-down vote on his proposal to extend tax cuts for annual income up to $250,000, absent a counteroffer from congressional leaders. The Republican-led House will convene a rare Sunday session on Dec. 30.

If the deadline is missed, the economy would probably enter a recession in the first half of 2013 after the automatic tax boosts and spending reductions, according to the Congressional Budget Office.

Handicapping Whims

“The most difficult thing about trading in this environment is trying to handicap the whims of politicians,” said Donald Ellenberger, who oversees about $10 billion as co- head of government and mortgage-backed securities at Federated Investors Inc. in Pittsburgh. “The fundamentals take a back seat to the headlines.”

John Brynjolfsson, chief investment officer at Armored Wolf LLC, said his firm is buying Treasury 10-year notes as lawmakers grapple in the budget-deficit showdown.

“That’s something that would benefit if the economy is dysfunctional and the Fed kind of steps up its open-mouth operations,” Brynjolfsson, who’s based in Aliso Viejo, California, said in an interview on Bloomberg Radio’s “Bloomberg Surveillance” with Michael McKee and Joe Brusuelas.

The efforts in Washington probably will produce “nothing that’s reasonable,” Brynjolfsson said.

Housing Data

Treasuries remained higher even after the National Association of Realtors reported pending home sales in the U.S. rose for a third month in November. The group’s index climbed 1.7 percent to 106.4, the highest reading since April 2010.

“It’s all about the fiscal cliff,” said Ian Lyngen, a government-bond strategist at CRT Capital Group LLC in Stamford, Connecticut. “We did not respond to this data at all. There’s not been a great deal of economic data that’s been far enough off the mark to change anyone’s broad expectations about the pace of the recovery or monetary policy.”

The central bank bought Treasuries today maturing from February 2021 to November 2022, according to the Fed Bank of New York’s website. The purchase is the last in the program to replace short-term Treasuries in the Fed’s holdings with longer- term debt to cap borrowing costs.

The Fed plans to purchase $45 billion of Treasuries a month at least as long as unemployment stays above 6.5 percent and inflation between one and two years ahead is projected to be no more than 2.5 percent. The central bank is also buying $40 billion of mortgage-backed securities each month.

To contact the reporters on this story: Daniel Kruger in New York at dkruger1@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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