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Treasuries Rally Is Longest Since July on Fiscal Cliff

Treasuries had the longest rally in almost four months as President Barack Obama and lawmakers started tax-and-spending talks to avoid the so-called fiscal cliff, stoking demand for refuge.

The yield on the 10-year note touched a 10-week low yesterday as House Speaker John Boehner offered a “framework,” including increased revenue, as part of a debt-reduction package. Some Federal Reserve officials said the central bank may need to buy more U.S. debt next year to bolster the economy, according to policy-meeting minutes, while volatility in Treasuries dropped to a five-year low. The U.S. will sell $13 billion in 10-year inflation-indexed securities on Nov. 21.

“If the powers that be in Congress are able to come up with a plan to get a resolution to the fiscal cliff, something of substance, then the market would view that as relatively good news,” said Jason Rogan, director of U.S. government trading at Guggenheim Partners LLC in New York. “The market is waiting to see the specifics and to hear a plan, as opposed to just positive rhetoric, which is certainly a first step.”

The benchmark 10-year yield fell three basis points, or 0.03 percentage point on the week, to 1.58 percent in New York, according to Bloomberg Bond Trader prices. The price of the 1.625 percent security due in November 2022 gained 1/4, or $2.50 per $1,000 face amount, to 100 13/32. The yield touched the least since Sept. 5. The market was closed Nov. 12 for Veterans’ Day.

The four-week drop in 10-year yields was the longest stretch of declines since the period ended July 20. It traded in a range of eight basis points this week, the narrowest on a weekly basis since April.

Futures Trade

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.

Treasuries traded yesterday at the most expensive levels in more than 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 0.94 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.

Relative Risks

“There’s more risk that yields will go lower than spike dramatically higher,” said Chris Ahrens, an interest-rate strategist at UBS AG in Stamford, Connecticut, one of the 21 primary dealers that trade with the Fed.

Bank of America Merrill Lynch’s MOVE index, which measures price swings for Treasuries based on options, dropped to 55.6 on Nov. 15, the lowest level since June 2007.

U.S. government securities are 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 Nov. 15, versus a 0.2 percent loss for company bonds, Bank of America Merrill Lynch indexes show.

U.S. bonds have been supported since Obama’s re-election on Nov. 6 as investors turned their attention to 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 began deficit-reduction talks yesterday with the top Republicans and Democrats in Congress, saying voters are demanding a deal.

“What folks are looking for, I think all of us agree on this, is action,” Obama said as he convened a meeting with Boehner and other congressional leaders in the Roosevelt Room at the White House.

“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, primary dealer.

Treasuries were supported this week by a crisis in the Middle East. Israel’s Defense Minister Ehud Barak signaled his nation may escalate its military operations against Gaza, bolstering demand for the safety of government debt.

Military Action

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.

“It’s tough for people to be short in front of the weekend with this situation in the Middle East,” Rogan of Guggenheim Partners said yesterday.

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 yesterday.

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

Fed Views

In the minutes of their last meeting released Nov. 14, 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.

Ten-year notes will yield 1.72 percent by Dec. 31 and 1.94 percent by June 30, according to a Bloomberg survey of banks and securities companies with the most recent projections given the heaviest weightings.

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