Treasuries Rise 3rd Day on Fiscal-Cliff Talks Concern

Treasuries advanced for a third day on speculation talks to avert the U.S. fiscal cliff of tax increases and spending reductions are making little headway, underpinning demand for the safest assets.

Ten-year yields dropped to the lowest level in a week as Erskine Bowles, co-chairman of President Barack Obama’s 2010 fiscal commission, estimated there is a one-third probability of a budget deal by the end of this year. The U.S. is scheduled to sell $35 billion of five-year notes today after demand at a two-year auction yesterday matched a record high. The Federal Reserve is acquiring as much as $18.36 billion in six Treasury purchases this week, including two operations today.

“There’s a bid for Treasuries, given the uncertainty surrounding the fiscal cliff,” said Thomas di Galoma, a managing director at Navigate Advisors LLC, a brokerage for institutional investors in Stamford, Connecticut.

The 10-year yield fell two basis points, or 0.02 percentage point, to 1.62 percent at 12:19 p.m. in New York after touching the least since Nov. 20, according to Bloomberg Bond Trader prices. The 1.625 percent note due in November 2022 gained 1/4, or $1.25 per $1,000 face amount, to 100 1/32.

Debt Returns

Treasuries have returned 2.5 percent this year, after gaining 9.8 percent in 2011, according to Bank of America Merrill Lynch indexes. The securities returned 0.4 percent this month, according to the indexes.

The difference between the yields on two and 10-year notes, the so-called yield curve, narrowed to 1.34 percentage points, the lowest in almost two weeks.

A yield curve plots the rates of bonds of the same quality, but different maturities. It steepens when yields on shorter-maturity notes fall, those on longer-dated bonds rise, or both happen simultaneously. The gap typically narrows when investors anticipate a slower recovery as they demand less compensation in anticipation of limited inflation.

Goldman Sachs Group Inc. Chief Executive Officer Lloyd Blankfein is among executives scheduled to make their case at the White House regarding a solution to the fiscal cliff. Congress and the President are negotiating on ways to avoid the $607 billion in tax increases and spending cuts scheduled to begin in January.

Budget Watch

Bowles a former chief of staff to President Bill Clinton, spoke today at a breakfast in Washington sponsored by the Christian Science Monitor. Senate Majority Leader Harry Reid lamented the lack of progress toward a deal yesterday.

“There’s been little progress with the Republicans, which is a disappointment to me,” Reid, a Nevada Democrat, told reporters yesterday in Washington.

Volatility in Treasuries dropped yesterday to the least in five years. Bank of America Merrill Lynch’s MOVE index, which measures price swings based on options, declined to 51.7 basis points, the lowest level since May 2007. It hit a 2012 high of 95.4 basis points. Volatility climbed to 264.6 basis points in October 2008 as the financial crisis intensified.

“The Fed buying in the market has been a lot of the reason why volatility has decreased,” said Thomas Roth, senior Treasury trader in New York at Mitsubishi UFJ Securities USA Inc. “They have obviously pushed rates to levels that obviously are artificial. There’s no new news out of Europe and there has been a couple of headlines on the fiscal cliff. It all adds up to taking people out of the market and they are sitting on the sidelines.”

Note Sale

The U.S. five-year notes scheduled for sale today yielded 0.65 percent in pre-auction trading. The offering is the second of three this week totaling $99 billion.

At yesterday’s $35 billion sale of two-year notes, investors bid for 4.07 times the amount allotted, matching the record high set in November 2011. The U.S. will sell $29 billion of seven-year securities tomorrow.

Today’s sale should “see reasonably strong demand,” Marc Ostwald, a rates strategist at Monument Securities Ltd. in London, wrote in a note to clients. “Particularly as the latest news on the fiscal-cliff negotiations shows no signs of the two sides getting any closer.”

Purchases of new U.S. homes unexpectedly declined in October, showing limited progress in the housing market recovery.

Home Sales

Sales dropped 0.3 percent to a 368,000 annual pace following a revised 369,000 rate in September that was weaker than initially reported, figures from the Commerce Department showed today in Washington. The median estimate of 74 economists surveyed by Bloomberg called for a 390,000 sales pace.

The Fed is scheduled to issue its Beige Book economic report at 2 p.m. in New York.

The Commerce Department will increase its estimate of third-quarter economic growth to 2.8 percent from 2 percent when it issues the data tomorrow, a separate Bloomberg survey showed.

The Fed purchased $1.85 billion of Treasuries maturing from February 2036 to November 2042 today, according to the Fed Bank of New York’s website. It is also scheduled to buy as much as $5.25 billion of securities due from November 2018 to November 2020, the website shows.

The next release of the tentative outright Treasury operation schedule will be at 2 p.m. on Nov. 30. The Fed is also selling shorter-term Treasuries from its holdings and buying those due in six to 30 years, under a program scheduled to end next month.

The central bank is seeking to put downward pressure on yields, after buying $2.3 trillion of Treasuries and mortgage-related bonds since 2008 in two rounds of quantitative easing, or QE. It said Oct. 24 it would extend its stimulus by purchasing $40 billion of home-loan securities a month until the labor market improves “substantially.”

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