U.S. 10-Year Yields Touch 10-Week Low on Debt-Cut Talks

Treasuries rose, with 10-year note yields touching a 10-week low, as President Barack Obama held a preliminary debt-reduction meeting with lawmakers, who called the session “constructive.”

Treasuries advanced for a fourth straight week, the longest stretch of increases since July, on concern an impasse will develop in Washington. Volatility in Treasuries dropped to a five-year low yesterday. Total foreign holdings of Treasuries rose for a 10th straight month to $5.46 trillion in September, a report showed.

The White House meeting is a “step in the right direction, but the overall decision needs to be made to address the bigger issue,” said Sean Murphy, a trader at Societe Generale SA in New York, one of the 21 primary dealers that are required to bid at government debt auctions.

The benchmark 10-year yield fell one basis point, or 0.01 percentage point, to 1.58 percent at 4:59 p.m. New York time, according to Bloomberg Bond Trader prices. The price of the 1.625 percent security due in November 2022 gained 1/8, or $1.25 per $1,000 face amount, to 100 13/32. The yield touched 1.55 percent, the least since Sept. 5.

Yield Drop

The yield on the two-year note dropped to 0.24 percent, touching the lowest level in six weeks, as Hamas said it fired at the Israeli parliament in Jerusalem.

Hedge-fund managers and other large speculators increased net-long position in 10-year note futures in the week ending Nov. 13, according to U.S. Commodity Futures Trading Commission data. Speculative long positions, or bets prices will rise, outnumbered short positions by 158,519 contracts on the Chicago Board of Trade, up 48,162 contracts, or 44 percent, from a week earlier.

Large traders also reversed to a net-long position in 30-year bond futures. Speculative long positions, or bets prices will rise, outnumbered short positions by 16,912 contracts, versus last week when traders were net-short 22,654 contracts.

The U.S. central bank bought $4.7 billion of Treasuries due from February 2021 to November 2022 today, according to the Fed’s Website. Fed purchases of Treasuries in two rounds of purchase programs totaling $2.3 trillion since 2008 and a $667 billion Operation Twist program to drive yields lower have stoked low volatility in the market.

Price Swings

Bank of America Merrill Lynch’s MOVE index, which measures price swings on Treasuries based on options, dropped to 55.6 yesterday, the lowest level since June 2007.

U.S. government securities were set to outperform corporate bonds on a monthly basis for the first time since May. Treasuries have returned 0.7 percent this month as of yesterday, versus a 0.2 percent loss for company bonds, Bank of America Merrill Lynch indexes show.

“We’ve had a pretty big move since the elections,” said Thomas Roth, senior Treasury trader in New York at Mitsubishi UFJ Securities USA Inc. “We’ve gotten to rich levels. There are a lot of things that could move the market, but it’s not moving because we are at very pricey levels.”

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.

Debt Talks

Obama held deficit-reduction talks with the top Republicans and Democrats in Congress, saying voters are demanding a deal.

House Speaker John Boehner said afterward that Republicans are willing to put revenue on the table in exchange for spending cuts. The Ohio Republican called the session “constructive” and said a deal is possible.

“We feel very comfortable with each other, and this isn’t something that we’re going to wait until the last minute to get it done,” Senate Majority Leader Harry Reid, a Nevada Democrat, said. Reid said the leaders will meet again with Obama the week after Thanksgiving.

Treasury Secretary Timothy F. Geithner said he is optimistic a deal on averting the fiscal cliff could be reached within weeks.

The U.S. announced yesterday it will sell $13 billion in 10-year inflation-indexed notes on Nov. 21. Treasury Inflation Protected Securities, or TIPS, have returned 7.7 percent this year.

Price Levels

The Fed’s preferred measure of inflation expectations, the five-year, five-year forward break-even rate, fell to 2.73 percent on Nov. 13, the most recent figure available in data compiled by Bloomberg, from 2.88 percent on Oct. 31.

Consumer prices increased 2.2 percent in October from the year before, the Labor Department reported yesterday. Inflation, as measured by this gauge, has averaged 2.5 percent over the past decade, after rising to as high as 14.8 percent in 1980.

Total foreign holdings of Treasuries rose for a 10th month, climbing $6.2 billion, or 0.1 percent to $5.455 trillion, the Treasury Department said today in Washington. Overseas investors held 50.7 percent of the Treasury’s outstanding public debt in September, the most since September 2011, the data show.

China remained the biggest foreign owner of U.S. Treasuries in September after its holdings rose $300 million to $1.16 trillion, according to the Treasury.

Overall international purchases of U.S. financial assets plunged in September as confidence grew that Europe was beginning to solve its debt crisis. Net buying of long-term equities, notes and bonds totaled $3.3 billion during the month, down from net purchases of $90.3 billion in August, the data showed. Economists surveyed by Bloomberg projected net buying of $50 billion of long-term assets, according to the median estimate.

Global Tension

Israel’s Defense Minister Ehud Barak signaled his nation may escalate its military operations against Gaza, bolstering demand for safety of government debt.

Egypt’s prime minister Hisham Qandil visited Gaza and said the Arab world was united behind Palestinians there, as Israel extended its aerial assault and militant groups kept up their barrage of rockets fired at the Jewish state.

“The continued fighting in the Middle East has also created this risk-off type of trade,” Societe Generale’s Murphy said.

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