Treasuries Gain for Third Week as Voters Elect Budget Standoff

Treasuries posted the longest winning streak since July as voters re-elected President Barack Obama and a Republican House of Representatives, indicating continued budget gridlock, which may restrict economic growth and boost haven demand.

The benchmark 10-year yield fell the most since the week ended Sept. 29 on concern the two sides may struggle to avert $607 billion in automatic spending cuts and tax increases scheduled to take effect starting in January, known as the fiscal cliff. U.S. debt gained even as Treasury auctioned $72 billion of coupon securities. The Federal Reserve will release minutes from its Oct. 24 meeting on Nov. 14, which may show whether the central bank intends to add Treasuries to its mortgage buying.

“Obama won and the market has shot up,” said Thomas Roth, senior Treasury trader in New York at Mitsubishi UFJ Securities USA Inc. “People are preparing for the worst, thinking the fiscal cliff is going to happen.”

The yield on 10-year notes declined 11 basis points this week, or 0.11 percentage point, to 1.61 percent in New York, according to Bloomberg Bond Trader prices. It touched 1.578 percent yesterday, the least since Sep. 5. The 1.625 percent note due in November 2022 finished at 100 5/32.

The 30-year bond yield declined 17 basis points to 2.74 percent, its biggest drop since the week ended June 1.

Gross Buys

Bill Gross, who runs the world’s biggest bond fund, increased his holdings of Treasuries for the first time since April as traders increased bets the Fed would add to stimulus measures.

Gross raised the proportion of U.S. government and Treasury debt at Pacific Investment Management Co.’s $281 billion Total Return Fund to 24 percent of assets last month, from 20 percent in September, according to a report on the Newport Beach, California-based company’s website. Mortgages remained the fund’s largest holding at 47 percent, down from 49 percent a month earlier. Pimco doesn’t comment directly on monthly changes in its portfolio holdings.

The difference between the yields on two-year and 10-year notes, the so-called yield curve, narrowed to as little as little as 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.

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 Fed that includes expectations for interest rates, growth and inflation, reached negative 0.93 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.

Hedge-fund managers and other large speculators decreased their net-long position in 10-year note futures in the week ending Nov. 6, according to U.S. Commodity Futures Trading Commission data.

Speculative long positions, or bets prices will rise, outnumbered short positions by 110,357 contracts on the Chicago Board of Trade. Net-long positions fell by 59,099 contracts, or 35 percent, from a week earlier.

Budget Plans

“The American people voted for action,” Obama said yesterday at the White House, giving his first public remarks on the budget and deficit since winning re-election Nov. 6. He again said any solution must include spending cuts and raising revenue, including raising taxes on the wealthiest.

House Speaker John Boehner called for a “simpler, cleaner, fairer tax code,” staking out the Republican position before Obama spoke.

“It’s going to be a bumpy ride going into the end of the year,” said Ward McCarthy, chief financial economist at Jefferies & Co. Inc. in New York, one of the 21 primary dealers that trade with the central bank. “The market reaction to the elections was that it’s not good for risk assets, so because that’s the case, the market flew back into Treasuries.”

Obama backs the Fed’s plan to boost the economy through bond purchases, known as quantitative easing. 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.

Fed Policy

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, a program known as Operation Twist. The $667 billion maturity extension program is set to expire at the end of the year.

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.

“The market’s questioning the effectiveness of QE in the face of impending fiscal tightening,” said Shyam Rajan, an interest-rate strategist at primary dealer Bank of America Corp. in New York.

“There is some chance that they would talk about what are the next possible steps, what are their plans after Operation Twist, but I think they’ll leave that to the December meeting,” Rajan said, referring the Fed meeting minutes.

Treasure sold $16 billion of 30-year bonds Nov. 8 at a yield of 2.82 percent, compared with a forecast of 2.848 percent in a Bloomberg News survey of nine primary dealers. The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of bonds offered, was 2.77, versus an average of 2.59 for the past 10 sales.

The U.S. sold $24 billion of 10-year debt Nov. 7 at a yield of 1.675 percent and auctioned $32 billion of three-year notes on Nov. 6 at a yield of 0.392 percent. Both sales drew lower demand than at previous offerings.

“There is definitely concern out there, given the policy and economic uncertainties, and even at these low yields investors are willing to pay up to get the long end,” said Jason Rogan, director of U.S. government trading at Guggenheim Partners LLC, a New York-based brokerage for institutional investors.

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