U.S. 10-Year Yield Falls to 2-Month Low on Fiscal Cliff

Treasuries rose, with 10-year yields reaching a two-month low, amid speculation U.S. lawmakers face headwinds to agree on measures to avoid the so-called fiscal cliff.

Benchmark yields headed for their biggest weekly drop since August as President Barack Obama’s re-election this week against Republican challenger Mitt Romney fueled bets the Federal Reserve will maintain bond purchases, known as quantitative easing. The fiscal cliff refers to more than $600 billion of tax increases and spending cuts scheduled to take effect automatically next year unless Congress acts. The difference between the yield on the two-year note and the 10-year security narrowed to the least in two months.

“The market feels that it’s not going to get resolved this year,” said Thomas di Galoma, a managing director at Navigate Advisors LLC, a brokerage for institutional investors in Stamford, Connecticut. “The general sentiment is that we’re probably going to see more muddling through on the economy and we’re probably going to see more QE in the next two to three years. That’s propelling bond prices higher.”

The 10-year yield dropped two basis points, or 0.02 percentage point, to 1.59 percent at 9 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 100 10/32. The yield earlier dropped to 1.578 percent, the lowest level since Sept. 5.

The yield has declined 12 basis points this week, the most since the period ended Aug. 31.

Expensive Debt

U.S. government securities traded at the most expensive levels in five weeks. The 10-year term premium, a model created by economists at the Federal Reserve that includes expectations for interest rates, growth and inflation, was negative 0.94 percent, the most costly since Oct. 3. A negative reading indicates investors are willing to accept yields below what’s considered fair value. The average this year is negative 0.76 percent.

The difference between the yields on two-year and 10-year notes, the so-called yield curve, narrowed to 132 basis points, the least since Sept. 5. Historically, a so-called flatter yield curve reflects higher demand from investors anticipating slower economic growth and inflation.

The Thomson Reuters/University of Michigan consumer sentiment index climbed to 82.9 this month from 82.6 in October, according to economists surveyed by Bloomberg before a preliminary reading of the gauge today. That would be the highest since September 2007.

Cliff Rally

The fiscal cliff appears to be an issue” behind the rally in Treasuries, said Michael Markovich, head of global interest-rates research at Credit Suisse Group AG in Zurich. “It is also clear Mr. Bernanke will have stronger political support than he would have with a Romney win.”

Romney had said he wouldn’t reappoint Fed Chairman Ben S. Bernanke.

The longest maturities, those most sensitive to inflation, rose the most this week. The difference between five- and 30-year yields shrank to as little as 2.10 percentage points today, the narrowest since Sept. 6.

The spread between yields on 10-year notes and similar-maturity Treasury Inflation Protected Securities, a gauge of expectations for consumer prices over the life of the debt, fell one basis point to 2.45 percentage points. Consumer prices have increased at an average rate of 2.5 percent for the past decade.

Fed Role

As Obama won re-election Nov. 6, Republicans kept control of the U.S. House of Representatives and Democrats held a majority in the Senate, raising concern the two parties will have trouble agreeing on a budget that will keep the nation out of recession.

Obama backs the Fed’s plan to boost the economy through bond purchases. The central bank has bought $2.3 trillion of Treasuries and mortgage-related bonds and instituted plans to purchase $40 billion of home-loan securities a month.

The Fed is also swapping shorter-term Treasuries in its holdings with those due in six to 30 years as part of its efforts to put downward pressure on long-term borrowing costs.

The central bank is scheduled to buy as much as $1.5 billion of Treasury Inflation Protected Securities maturing from January 2019 to February 2042 today as part of the program, according to the Fed Bank of New York’s website.

The 10-year yield will rise to 1.70 percent by the end of the year, according to a Bloomberg survey of banks and securities companies with the most recent projections given the heaviest weightings.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE