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Treasuries Gain on U.S. Budget Gridlock, European Debt Concern

Treasuries rose, pushing yields to almost a six-week low, as U.S. lawmakers said they are on the brink of failure to agree on spending cuts, spurring demand for the safest assets.

Benchmark 10-year notes advanced for the fifth time in six days as European stocks fell and government bonds from Spain and Italy declined amid concern the region’s leaders will struggle to fix the debt crisis. The Treasury and the Federal Reserve plan to sell as much as $116.5 billion of notes this week, including up to $52.5 billion today.

“The bigger issue is just what’s going on in Europe, and now there’s uncertainty as to what’s going on with the supercommittee,” said Dan Mulholland, a Treasury trader in New York at RBC Capital Markets LLC, the investment-banking arm of Canada’s biggest bank, one of 21 primary dealers that trade Treasuries with the Fed. “You’ll see more of a flight to quality.”

The 10-year yield fell seven basis points, or 0.07 percentage point, to 1.95 percent at 11:05 a.m. New York time, according to Bloomberg Bond Trader prices. The 2 percent security due November 2021 advanced 19/32, or $5.94 per $1,000 face amount, to 100 16/32. The rate dropped to 1.93 percent on Nov. 9, the lowest level since Oct. 6.

The difference between the yields on two- and 10-year notes narrowed to 1.68 percentage points. It touched 1.67 percentage points, the lowest since Oct. 6. The spread between the yields on the two- and 30-year securities narrowed to 2.65 percentage points, the least since Oct. 5.

Stocks Slide

The Standard & Poor’s 500 Index fell 2.5 percent. Spain’s 10-year bond yield rose 17 basis points to 6.554 percent and Italy’s advanced three basis points to 6.67 percent.

Treasuries due in more than a year have returned 1.2 percent during the past three months, the biggest gain of bonds in 26 markets in U.S. dollar terms except for a 2.4 percent gain for Ireland, indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies show.

The TED spread, the difference between what lenders and the U.S. government pay to borrow for three months, was 49 basis points, the most since June 2009.

Interest-rate swap spreads, a measure of stress in credit markets, climbed today. The difference between the two-year swap rate and the comparable-maturity Treasury note yield increased a basis point to 49.94, near the highest since May 2010, according to data compiled by Bloomberg.

Budget Failure

The U.S. congressional supercommittee will probably announce today it has failed to reach agreement on federal budget savings, a Democratic aide said. The aide, who wasn’t authorized to discuss internal matters publicly and requested not to be identified, wrote in an e-mail that it was highly unlikely the committee’s talks could be salvaged.

Senator John Kerry, a Massachusetts Democrat and supercommittee member, said the U.S. may have its debt rating reduced if the group can’t reach an agreement.

“There is a real threat that not only will there be a downgrade but that the market on Monday will look again at Washington and say ‘You guys can’t get the job done,’” Kerry said on NBC’s “Meet the Press” program.

Standard & Poor’s cut its ranking for U.S. debt to AA+ from AAA on Aug. 5, citing the nation’s political process and criticizing lawmakers for failing to cut spending or raise revenue enough to reduce record budget deficits.

Risk Demand

“Risk aversion is dominating all market sectors,” said Ralf Umlauf, head of floor research at Helaba Landesbank Hessen-Thueringen in Frankfurt. “The outcome of the supercommittee may lead to more risk aversion, and we think that Europe’s debt crisis will last for many weeks and months and this will also support Treasuries.”

Credit-default swaps on U.S. debt rose two basis points to 52.83 basis points as of 8 a.m. in New York, according to data provider CMA, which is owned by CME Group Inc., and compiles prices in the privately negotiated market.

The Fed sold $8.5 billion in notes maturing February to July 2012. It will also offer a similar of securities maturing March to November 2014 later today. The sales are part of a program known as Operation Twist in which it is divesting $400 billion in short-term notes and purchasing the same amount of longer-term securities.

Treasury Auctions

The U.S. Treasury is scheduled to sell $35 billion of two-year notes at 1 p.m. The notes yielded 0.29 percent in pre-auction trading, compared with 0.281 percent at the prior sale on Oct. 25. Investors bid for 3.64 times the amount on offer in October, versus the average of 3.32 for the past 10 of the monthly auctions.

“Supply has never been a problem when the markets are in turmoil,” said Paul Horrmann, a broker in New York at Tradition Asiel Securities Inc., an interdealer broker. “There doesn’t seem to be any concrete solutions in Europe.”

The Treasury will auction $35 billion of five-year notes tomorrow and $29 billion of seven-year notes on Nov. 23.

Sales of previously owned homes in the U.S. unexpectedly rose in October, a sign falling prices may be luring buyers into the market.

Purchases increased 1.4 percent to a 4.97 million annual rate, the National Association of Realtors said in Washington. The median forecast of 75 economists surveyed by Bloomberg News projected a 4.8 million rate.

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