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U.S. Yields Rise First Time in 5 Weeks on Fiscal-Cliff Optimism

Treasuries fell, pushing 10-year note yields higher for the first in five weeks, on optimism President Barack Obama and lawmakers will reach an agreement to avert the so-called fiscal cliff, damping refuge demand.

The benchmark yield touched a two-week high yesterday as finance ministers from the euro area prepare to hold a meeting on Nov. 26 to discuss unlocking bailout funds for Greece, after failing to reach an agreement earlier this week. Federal Reserve Chairman Ben S. Bernanke said earlier this week an agreement to reduce long-term U.S. deficits may remove an impediment to economic growth next year. The U.S. will sell $99 billion in notes next week.

“The key market focus will be how the negotiations are proceeding” on the fiscal cliff, said Priya Misra, head of U.S. rates strategy at Bank of America Corp. in New York, one of the 21 primary dealers that trade with the Fed. “The last thing we heard from Congress was positive.”

The benchmark 10-year yield rose 11 basis points, or 0.11 percentage point on the week, to 1.69 percent in New York, according to Bloomberg Bond Trader prices. The price of the 1.625 percent security due in November 2022 lost 1 point, or $10 per $1,000 face amount, to 99 13/32.

The yield rose for the first five-day period since Oct. 19 and touched 1.70 percent yesterday, the highest since Nov. 7.

Mideast Update

The yield on the two-year note rose to 0.27 percent yesterday, the highest level in more than two weeks, after a cease-fire accord between Israel and the Palestinian militant group Hamas on Nov. 21 damped refuge demand.

The U.S. market was shut Nov. 22 for Thanksgiving holiday. It closed at 2 p.m. in New York yesterday.

Treasuries traded at the least expensive levels in more than two 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 0.87 percent yesterday, the least costly since Nov. 6. 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.

Volatility dropped to a five-year low on Nov. 20. Bank of America Merrill Lynch’s MOVE index, which measures price swings on Treasuries based on options, dropped to 53.7, the lowest level since May 2007.

Trading Pace

Treasury trading volume dropped to $163 billion on Nov. 21, compared with the 2012 daily average of $241 billion, according to ICAP Plc, the largest inter-dealer broker of U.S. government debt.

“The conversation is entirely fiscal-cliff related,” said Dan Greenhaus, chief global strategist at the broker-dealer BTIG LLC in New York. “Where conversations are headed will be important to investors.”

The fiscal cliff refers to the $607 billion combination of automatic spending cuts and tax increases scheduled to take effect in January unless lawmakers reach an agreement on long-term deficit reduction.

The 10-year yield has risen since it reached a two-month low of 1.55 percent on Nov. 16 when President Obama met with congressional leaders about the fiscal cliff. House Speaker John Boehner and White House Press Secretary Jay Carney last week both described the discussions as “constructive.”

Bernanke View

“Cooperation and creativity to deliver fiscal clarity --in particular, a plan for resolving the nation’s longer-term budgetary issues without harming the recovery -- could help make the new year a very good one for the American economy,” Bernanke said Nov. 20 in a speech to the Economic Club of New York. “Failure to avoid the so-called fiscal cliff would pose a substantial threat to the recovery.”

The Congressional Budget Office said Nov. 8 the tax increases and spending cuts would cause gross domestic product to contract 0.5 percent in 2013. The U.S. economy is forecast to grow by 2.2 percent in 2012, and 2 next year, according to economists in a Bloomberg News survey.

The Commerce Department may say on Nov. 27 that bookings for goods meant to last at least three years fell 0.8 percent in October from the prior month, according to the median projection of economist surveyed by Bloomberg.

Fed Plans

The Fed is scheduled to conduct six purchase operations next week as part of its $667 billion Operation Twist program to strengthen the economic recovery. It will conduct two separate operations on Nov. 28 of securities maturing from February 2036 to November 2042 and November 2018 to November 2020. The program is scheduled to end in December.

Primary dealers expect expanded buying of Treasuries to continue next year after the program ends. The Fed has purchased $2.3 trillion in securities in two so-called quantitative easing programs since 2008 to spur economic growth.

The U.S. is scheduled to auction $35 billion of two-year notes on Nov. 27, an equal amount of five-year securities the next day and $29 billion of seven-year debt on Nov. 29.

“I don’t think the supply should weigh the market down too much,” said Justin Lederer, an interest rate strategist at Cantor Fitzgerald LP in New York, a primary dealer. “We have six Fed operations.”

Ten-year notes will yield 1.74 percent by Dec. 31 and 1.97 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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