Treasuries Rise for Fourth Day on Debt-Limit Talks

Treasuries rose for a fourth day on speculation political wrangling over the U.S. debt ceiling will curb economic growth, fueling demand for the safety of debt.

Ten-year yields approached the lowest level in two weeks as the World Bank cut its global-growth forecast, saying austerity and high unemployment will weigh on developed nations. The Federal Reserve is scheduled to buy as much as $1.75 billion of Treasuries due between 2036 to 2042 today as part of its program to cap borrowing costs. Fed Bank of Boston President Eric Rosengren said policy makers may boost monthly debt purchases to meet their twin goals of stable prices and full employment.

“The U.S. still has a number of hurdles to clear in terms of domestic policy and event risks in the weeks ahead that the market will be cautious about,” said Orlando Green, a fixed- income strategist at Credit Agricole SA in London. “There’s certainly a concern in terms of global prospects. In the near- term there are going to be intermittent rallies in Treasuries. Overall our view is that yields will go higher.”

The 10-year yield dropped two basis points, or 0.02 percentage point, to 1.82 percent at 6:50 a.m. in New York, according to Bloomberg Bond Trader prices. The 1.625 percent note due in November 2022 rose 7/32, or $2.19 per $1,000 face amount, to 98 10/32. The yield fell to 1.81 percent yesterday, the lowest since Jan. 2.

Ten-year yields will increase to 2.27 percent by Dec. 31, according to a Bloomberg survey of financial companies with the most recent projections given the heaviest weightings.

Emergency Measures

The U.S. government makes about 80 million payments each month, including for Social Security, veterans’ benefits, defense contractors, law enforcement and income-tax refunds.

The Treasury uses emergency measures to delay a default as the total value of debt nears the ceiling. Exhausting the extraordinary steps without raising the limit would require it to fund the government with cash on hand, which wouldn’t be adequate “for any meaningful length of time,” according to Treasury Secretary Timothy F. Geithner.

Congress has raised or revised the limit 79 times. their twin goals of stable prices and full employment.

“We will have a serious problem next month” if politicians don’t raise the borrowing limit, said Kim Youngsung, head of fixed income in Seoul at Samsung Asset Management Co., South Korea’s largest private bond investor. “It will have a negative impact on the global economy. I hope the problem will be solved, and yields will go up again.”

Under Pressure

Fitch Ratings said yesterday its AAA credit ranking on the U.S., France and the U.K. will probably come under pressure this year because of the slow pace of economic expansion and high debt levels. Moody’s Investors Service warned Jan. 2 that further measures to control the deficit were needed to support the U.S.’s top Aaa standing.

While Standard & Poor’s stripped the U.S. of its AAA rating in 2011, demand for Treasuries was maintained in 2012, sending the 10-year yield to a record low of 1.38 percent in July.

The World Bank yesterday lowered it global-growth forecast for this year to 2.4 percent, from a June prediction of 3 percent. It halved its estimate for Japan, cut the U.S. projection by 0.5 percentage point and forecast a second year of contraction in the euro region.

The Washington-based bank also lowered projections for emerging markets led by Brazil, India and Mexico.

Industrial Production

U.S. reports today will show industrial production slowed in December while consumer prices were unchanged from a month earlier, based on Bloomberg News surveys of economists. Goldman Sachs Group Inc. and JPMorgan Chase & Co. will both release fourth-quarter earnings

The Treasury is scheduled to report on foreign ownership of U.S. securities for November.

Japan raised its holdings of U.S. debt to $1.13 trillion as of October from $1.06 trillion at the end of 2011, and is on pace to again become the largest U.S. creditor since slipping to second place in September 2008. China owns $1.16 trillion.

The Fed is purchasing government and mortgage debt each month to spur the economy by putting downward pressure on interest rates.

“There is the capacity to enlarge it if that were to become necessary,” the Boston Fed’s Rosengren said yesterday in a telephone interview with Bloomberg News.

Fed Bank of Philadelphia President Charles Plosser said he sees medium-to-longer-term inflation risks “given the current stance and anticipated path of monetary policy,” in a speech yesterday in Rochester, New York. Rosengren votes on monetary policy this year, while Plosser doesn’t.

This week’s rally has made U.S. government securities the most expensive in two weeks. The 10-year term premium, a model created by economists at the Fed that includes expectations for interest rates, growth and inflation, was negative 0.78 percent today, the least since Jan. 1.

A negative reading indicates investors are willing to accept yields below what’s considered fair value.

To contact the reporters on this story: Neal Armstrong in London at narmstrong8@bloomberg.net; Wes Goodman in Singapore at wgoodman@bloomberg.net

To contact the editor responsible for this story: Paul Dobson at pdobson2@bloomberg.net

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