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U.S. 10-Year Yield Touches 2-Month Low Before Fiscal-Cliff Talks

Treasury 10-year note yields reached a two-month low before President Barack Obama meets Democratic and Republican leaders in Congress this week for negotiations to avert the so-called fiscal cliff.

The difference between the yield on the two-year note and the 10-year security narrowed to the least in two months, signaling market anticipation of slower economic growth. European officials and the International Monetary Fund clashed about the time Greece will be given to reduce its debt levels, boosting haven demand. The Federal Reserve bought $4.85 billion of Treasuries due from 2018 to 2020 today as part of its program to reduce longer-term borrowing costs.

“The fiscal cliff is going to be the overriding factor from now until January,” said Jeffry Feigenwinter, head of Treasury trading in New York at Societe Generale SA, one of 21 primary dealers that trade Treasuries with the Fed. “We’ll keep a bid in Treasuries till year-end. We’ll remain in the same range we’ve been in, 1.87 to 1.58 percent.”

The 10-year yield fell one basis point, or 0.01 percentage point, to 1.59 percent at 4:59 p.m. in New York according to Bloomberg Bond Trader prices, after dropping to 1.57 percent, the lowest level since Sept. 5. The 1.625 percent note due in November 2022 rose 3/32, or 94 cents per $1,000 face amount, to 100 9/32.

The U.S. bond market was shut yesterday for Veterans’ Day.

Trading Pace

Treasury trading volume dropped to $192 billion as of 5:01 p.m. in New York, marking the lowest level in November, according to ICAP Plc, the largest inter-dealer broker of U.S. government debt. It touched a 2012 high of $464 billion on Sept. 13, the highest in 13 months.

A so-called triangular consolidation trading pattern on 10-year Treasury note futures suggests a bullish breakout for the contract that would equal the high reached in July, according to Bank of America Corp.

“While bearish momentum divergences should be a concern for longer term bulls, the increasingly triangular consolidation points to a bullish break,” MacNeil Curry, chief rates and currencies technical strategist at Bank of America Merrill Lynch in New York, wrote today in a client note.

The December 10-year futures contract touched a high of 134 18/32 on July 25. It climbed today to 134 5/32. The note is “carving out a four-day symmetrical triangle, which points to a push” to the higher level, Curry wrote.

Yield Difference

The so-called yield curve measuring the gap between yields on two- and 10-year debt narrowed to 1.32 percentage points. It steepened to a 2012 high of 2 percentage points in March.

Historically, a flatter yield curve reflects rising demand from investors anticipating slower economic growth and inflation.

Ten-year yields have fallen about 16 basis points since the Nov. 6 re-election of Obama, who supports the Fed’s plan to spur the economy through bond purchases. Obama is due to meet with Republican and Democrat leaders from the House and Senate on Nov. 16.

U.S. Treasury Secretary Timothy F. Geithner said today that it was “deeply implausible” that Republicans in Congress would force the U.S. over the fiscal cliff. Geithner was speaking at an event in Washington.

Budget Debate

The fiscal cliff stems from a standoff between the President and Congress about how to curb soaring U.S. debt through a mix of tax-code changes and reduction in federal spending. Without legislation, a combined $607 billion in tax increases and spending cuts will take effect starting in January.

“People are concerned it will lead to slower economic growth and a potential downgrade for U.S. debt,” said Dan Mulholland, head of U.S. Treasury trading in the capital-markets unit of BNY Mellon Corp. in New York.

The U.S. government’s budget deficit widened in October, the first month of the new fiscal year, the Treasury Department said today in Washington.

The deficit expanded 22 percent to $120 billion from a $98.5 billion shortfall in October 2011, The gap exceeded the $113 billion median estimate in a Bloomberg survey of economists.

IMF Managing Director Christine Lagarde took issue with a decision by euro-area chiefs to postpone the goal of getting Greece’s debt down to a “sustainable” level of 120 percent of gross domestic product by two years, until 2022.

Greek Debt

“Debt sustainability of Greece has to be measured in 2020,” Lagarde said yesterday. “We clearly have different views. What matters at the end of the day is the sustainability of the Greek debt.”

Treasuries pared gains after Germany’s Bild newspaper reported that the nation favored disbursing 44 billion euros ($55.9 billion) of additional aid to Greece in one payment.

“We’re held captive to any headlines out of Europe and any equity movements,” Societe Generale’s Feigenwinter said. “It’s the whole region that’s the concern.”

Economists said a U.S. report this week will show consumer-price inflation stayed higher than Treasury yields.

U.S. consumer prices excluding food and energy gained 2 percent in October from a year ago, according to the median forecast of economists surveyed by Bloomberg News before the data is released Nov. 15. A similar gauge for producer prices climbed 2.4 percent, a separate Bloomberg survey showed before the report tomorrow.

Real Yields

The so-called real yield on U.S. 10-year notes, or the difference between their yield and the current rate of inflation, was minus 40 basis points, the most negative since May.

U.S. government securities traded close to the most expensive levels in almost six 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 0.93 percent, the near 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.

Bill Gross, co-chief investment officer and founder of Newport Beach, California-based Pacific Investment Management Co., addressed the low-yielding environment in a Twitter post today.

“Making money w/money is increasingly difficult w/near zero yields,” Gross wrote, adding that investors should “go light on banks, insurance, real estate investment trusts and other finance companies.”

The Fed has kept the federal funds target rate at zero to 0.25 percent since December 2008.

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