Treasuries Decline on Speculation Deficit-Cut Deal May Be Found

Treasuries fell for the first time in four days as speculation congressional negotiators will resolve a budget-deficit showdown by the midnight deadline damped demand for the safety of U.S. government debt.

The yield on the 10-year note still headed for its lowest year-end close ever as Congress seeks to avoid the so-called fiscal cliff of more than $600 billion in automatic spending cuts and tax increases set to start taking effect tomorrow. Those changes would cause a recession in the first half of 2013, according to the Congressional Budget Office. Senate Majority Leader Harry Reid said talks are “progressing.”

“There is optimism here,” said Dan Greenhaus, chief global strategist at the broker-dealer BTIG LLC in New York. “There’s a modest little selloff.”

The 10-year yield increased three basis points, or 0.03 percentage point, to 1.73 percent at 11:26 a.m. in New York, according to Bloomberg Bond Trader prices. The yield touched 1.74 percent, its 200-day moving average. It fell earlier to 1.69 percent, reaching for a second day its 100- and 50-day moving averages.

The price of the 1.625 percent note due in November 2022 declined 7/32, or $2.19 per $1,000 face amount, to 99 2/32. Ten- year yields declined six basis points last week.

Treasury trading in the U.S. will stop at 2 p.m. New York time today, according to the Securities Industry and Financial Markets Association website. The market will be shut worldwide tomorrow for New Year’s Day.

Trails Forecast

The 10-year note yield has dropped from 1.88 percent at the end of 2011. Economists had forecast it would end 2012 at 2.5 percent, according to their median forecast in a Bloomberg News survey published Jan. 12. The yield touched a record daily low of 1.379 percent on July 25.

The yield is approaching the lowest close on a yearly basis since at least 1962, according to data compiled by Bloomberg. The current year-end record low is last year’s 1.88 percent.

The yield closed at a historic year-end high of 13.98 percent in 1981 in part because then Federal Reserve Chairman Paul Volcker had raised interest rates in 1980 to 20 percent to battle inflation. The yield is forecast to end 2013 at 2.17 percent, according to a Bloomberg News survey of economists.

Pacific Investment Management Co.’s Bill Gross, manager of the world’s biggest bond fund, expects Treasury five-year notes to yield 0.7 percent at the end of 2013, he wrote today in a Twitter post. The note yielded 0.72 percent today.

Newport Beach, California-based Gross also said he expects the dollar to decline and oil to climb above $100 next year. Oil traded today at $91 a barrel, and the greenback gained 0.2 percent to $1.3192 per euro. Gross wrote in a post yesterday he expects stocks and bonds to return less than 5 percent next year as unemployment persists at 7.5 percent or higher.

Treasury Returns

Treasuries due in 10 years and longer returned 4.9 percent in 2012, the 113th best performer of 144 debt indexes tracked by Bloomberg and the Federation of Financial Analysts Societies. Last year, the securities surged 29 percent to rank No. 1.

U.S. government securities have returned 2.3 percent this year, the lowest since losing 3.7 percent in 2009, according to Bank of America Merrill Lynch data. Gains were tempered as safety demand declined on bets Europe was handling its debt crisis and as U.S. economic data improved.

U.S. investment-grade corporate debt has returned 11 percent this year and high-yield debt has gained 16 percent, Merrill Lynch indexes show, as companies took advantage of borrowing costs that fell as the Fed kept interest rates near zero for a fourth year to prop up the economy.

‘Can’t Happen’

“We’ve been through 30 years of a bull market in fixed- income,” said David Ader, head of U.S. government-bond strategy at CRT Capital Group LLC in Stamford, Connecticut. “The type of returns the bond market has provided over the last 30 years is not going to be seen. Mathematically it just can’t happen. There’s going to be a move someday and it’s going to be a bearish one.”

U.S. mortgage-backed securities gained 2.6 percent in 2012, another Merrill Lynch index showed, as returns were limited by higher refinancings.

Treasuries fluctuated earlier amid uncertainty on lawmakers’ ability to reach a budget agreement.

Senate Majority Leader Reid said negotiators could reach a U.S. budget deal today.

“They’re progressing,” Reid, a Nevada Democrat, said of the talks in an interview as he entered the Capitol this morning. Asked if he thought a deal could be reached today, Reid said, “I really hope so. We’re not there yet, though.”

Talks between Reid and Senate Minority Leader Mitch McConnell stalled yesterday because of disputes over income tax rates, the estate tax and other issues.

To contact the reporter on this story: Susanne Walker in New York at swalker33@bloomberg.net

To contact the editor responsible for this story: Robert Burgess at bburgess@bloomberg.net

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