Treasuries in Narrowest Range in Six Weeks Before Cliff Talks

Treasury 10-year note yields traded in the narrowest range in six weeks as President Barack Obama prepared to meet lawmakers tomorrow to discuss ways to avoid the so-called fiscal cliff that may push the U.S. into a recession.

U.S. debt pared losses earlier today after more Americans than forecast submitted claims for unemployment insurance last week as Hurricane Sandy wreaked havoc. Yields had gained as investors bet rates at two-month lows weren’t justified, given that the world’s largest economy is sustaining its recovery, even as the euro area slipped into recession. The Federal Reserve’s primary dealers expect expanded buying of Treasuries next year, a survey showed.

“There’s been a post-election drop in yields on the idea that we’re closer to the fiscal cliff,” said Larry Dyer, a U.S. interest rate strategist with HSBC Holdings Plc in New York, one of 21 primary dealers that trade with the Fed. “The yield range is likely to stay relatively muted. In that environment, investors stay close to home.”

Ten-year yields were little changed at 1.59 percent at 4:59 p.m. New York time, according to Bloomberg Bond Trader prices. The 1.625 percent security due November 2022 traded at 100 9/32. The yield has traded in a 6.2 basis point range in the past three days, the least since the three days ending Oct.3.

“We’re anticipating a 1.4 percent 10-year note over time,” Dyer said.

Inflation Protection

The U.S. announced it will sell $13 billion in 10-year inflation-indexed notes on Nov. 21. Treasury Inflation Protected Securities, or TIPS, have returned 7.9 percent this year.

Volatility dropped yesterday close to the lowest level since 2007, according to the latest data available from Bank of America Merrill Lynch’s MOVE index, which measures price swings based on options. It touched 56.8, compared with a 2012 low of 56.7 basis points in May, the least since 2007. The average during the past decade is 99.22 basis points.

Treasuries have returned 1 percent since the election, according to Bank of America Merrill Lynch indexes. That’s compared with a 0.5 percent gain for their German counterparts.

The U.S. economy is forecast to expand 2.2 percent in 2012 and 2 percent next year, according to Bloomberg data.

Election Watch

U.S. bonds have been supported since Obama’s re-election on Nov.6 as investors turned their attention to the fiscal cliff, the $607 billion of tax increases and spending cuts that will automatically come into force at the beginning of 2013 unless lawmakers act. Obama said yesterday that voters want to cut the budget deficit by imposing higher taxes on the wealthy and reducing spending. Republicans oppose raising taxes.

“You are firmly tucked into the environment where all things revolve around the fiscal cliff,” said Tom Porcelli, chief U.S. economist at Royal Bank of Canada’s RBC Capital Markets unit, one of 21 primary dealers that trade with the Fed.

A report earlier showed gross domestic product in Europe’s 17-nation single-currency region slipped 0.1 percent in the third quarter after a 0.2 percent decline in the previous three months. The data from the EU’s statistics office in Luxembourg was in line with the median forecast in a Bloomberg News survey of 44 economists.

Bullish Events

“You have the fiscal cliff and there’s some deterioration in Europe, said Ray Remy, head of fixed income in New York at Daiwa Capital Markets America Inc., one of 21 primary dealers that trade directly with the Fed. “We’re probably going to continue to rally. Ten-year notes may go to 1.50 by next week.”

Treasuries were also supported amid turmoil in the Middle East. Tel Aviv residents were sent to air raid shelters as Gaza’s Islamic Jihad militia said it fired rockets at Israel’s largest city.

The cost of protecting Israeli bonds against default surged to the highest level in two months and the shekel weakened after police said a rocket from Gaza was fired at the Tel Aviv area.

The U.S. central bank purchased $1.85 billion of Treasuries due from February 2036 to November 2042 today as part of its Operation Twist program to replace short term debt in its portfolio with longer-term Treasuries.

Bond Buys

In the minutes of their last meeting released yesterday some Fed officials said the central bank may need to expand its monthly purchases of bonds next year after the December expiration of a program known as Operation Twist, which involves selling short-term debt and buying longer maturities.

Primary dealers saw the Fed continuing with its asset-purchase program for more than a year in a survey conducted by the central bank before its Oct. 23-24 meeting.

The median respondent in the survey by the Fed Bank of New York predicted that the central bank will continue with its “flow-based” asset-purchase program until the first quarter of 2014. Primary dealers also saw the Fed purchasing $45 billion of Treasury securities and $40 billion of mortgage debt after the December and January meetings of the Federal Open Market Committee.

Pacific Investment Management Co.’s Mohamed El-Erian said the Fed will expand its bond purchases to include Treasuries by early next year.

The central bank in its December or January Federal Open Market Committee meeting will announce plans to add Treasury purchases to the $40 billion in mortgage-backed securities it is now buying in its third round of quantitative easing, known as QE3, El-Erian, chief executive officer of the world’s biggest manager of bond funds, said in an interview on Bloomberg Television’s “In the Loop” with Betty Liu. The Fed will also take additional steps to improve transparency in communication of the path of monetary policy, he said.

Economic Data

Treasury yields pared gains earlier as applications for jobless benefits surged by 78,000 to 439,000 in the week ended Nov. 10, the most since April 2011, the Labor Department said today in Washington. Several states said the increase was due to the storm that hit the Northeastern part of the U.S. in late October, a Labor Department spokesman said as the data were released to the press.

The cost of living rose in October at the slowest pace in three months, a sign U.S. inflation is in check. The 0.1 percent increase in the consumer-price index followed a 0.6 percent gain the prior month, the Labor Department reported today in Washington.

The median estimate of 83 economists surveyed by Bloomberg called for a 0.1 percent rise. The so-called core measure, which excludes more volatile food and energy costs, climbed 0.2 percent, more than projected, reflected rising rents and clothing costs.

The difference in yields between 10-year notes and TIPS narrowed to 2.37 percentage points, the least since Sept. 7. The gap, known as the 10-year break-even rate, widened to 2.7 percentage points on Sept. 17, the most since May 2006.

The five- year, five- year forward break-even rate, which projects the pace of price increases starting in 2017, narrowed to 2.76 percent on Nov. 9, the least in a month.

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