Treasuries Erase Losses as Boehner Says No Deficit Gains

Treasuries erased losses after Republican House Speaker John Boehner said “no substantive progress” has been made in talks to avert the so-called fiscal cliff, boosting demand for haven assets.

Government debt fell earlier today on speculation lawmakers were making progress in budget talks to avoid automatic spending cuts and tax increases. The Treasury will sell $29 billion of seven-year notes today after demand rose at an auction of five-year debt yesterday. The Federal Reserve is acquiring as much as $17.2 billion in six Treasury purchases this week, including a purchase of $4.74 billion today.

“The market is focused on utterances from people in Congress on one side of this debate or the other,” 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. “Boehner tempered those statements by saying he will do everything to not go over the cliff.”

The yield on the benchmark 10-year note dropped one basis point, or 0.01 percentage point, to 1.62 percent at 12:01 p.m. in New York, according to Bloomberg Bond Trader prices. The 1.625 percent note due in November 2022 added 3/32, or 94 cents per $1,000 face amount, to 100 2/32. The yield reached 1.64 percent earlier today. It dropped to 1.60 percent yesterday, the lowest since Nov. 19.

Debt Returns

Treasuries have returned 2.7 percent this year, after gaining 9.8 percent in 2011, according to Bank of America Merrill Lynch indexes. The securities returned 0.6 percent this month, according to the indexes.

The difference between the yields on two and 10-year notes, the so-called yield curve, widened to 1.38 percentage points after reaching 1.34 percentage points yesterday, the most narrow in almost two weeks.

Volatility in Treasuries rose yesterday from five year lows. Bank of America Merrill Lynch’s MOVE index, which measures price swings based on options, increased to 52.3 basis points from 51.7 basis points the previous day, the lowest level since May 2007. It hit a 2012 high of 95.4 basis points on June 15. Volatility climbed to 264.6 basis points in October 2008 as the financial crisis intensified.

Treasury trading volume rose yesterday to the most in three weeks. About $281.5 billion changed hands, the most since Nov. 7, after trading below the 2012 daily average of $240 billion for almost a week, according to ICAP Plc, the largest inter-dealer broker of U.S. government debt.

Deficit Goals

Treasury Secretary Timothy F. Geithner will meet the top four leaders in Congress today, after chief executives from more than a dozen U.S. corporations shuttled from the Capitol to the White House yesterday and pressed both sides for an agreement to prevent triggering automatic spending cuts and tax increases on Jan. 1.

“The market is still focused on the fiscal cliff,” said Tom Porcelli, chief U.S. economist at Royal Bank of Canada’s RBC Capital Markets, a primary dealer. “It’s creating a cloud of uncertainty around this outlook.”

Treasuries advanced yesterday after the $35 billion five-year sale drew the highest demand in eight years from direct bidders amid concern Congress faces headwinds in resolving the fiscal cliff.

Direct bidders, non-primary dealer investors that place their orders with the Treasury, purchased 15.9 percent of the notes, the most since September 2004.

Auction Outcomes

A $35 billion two-year auction on Nov. 27 drew orders for 4.07 times the amount of debt available, matching the record high from November 2011.

The seven-year notes scheduled for sale today yielded 1.05 percent in pre-auction trading. Today’s sale will conclude this week’s $99 billion in notes auctions.

The Fed is selling shorter-term Treasuries from its holdings and buying those due in six to 30 years under a program known as Operation Twist, which is scheduled to end next month.

The central bank bought Treasuries today maturing from February 2021 to November 2022, according to the Fed Bank of New York’s website.

Fed Bank of New York President William C. Dudley said he is weighing “unacceptably high” joblessness as he considers whether the central bank should increase its asset purchases.

Fed View

“I will be assessing the employment and inflation outlook in order to determine whether we should continue Treasury purchases into 2013,” Dudley said today in the text of remarks for a speech in New York. “The Fed will promote maximum employment and price stability to the greatest extent our tools permit, and we will stay the course.”

The policy-setting Federal Open Market Committee next meets on Dec. 11-12 to assess the impact of record accommodation, including a plan to buy $40 billion in mortgage bonds per month to reduce unemployment. The central bank said last month it will buy bonds until the job market improves “substantially.”

Gross domestic product grew at a 2.7 percent annual rate, up from a 2 percent prior estimate, revised figures from the Commerce Department showed today in Washington. The median forecast of 82 economists surveyed by Bloomberg called for a 2.8 percent gain. Household purchases climbed at a 1.4 percent rate, the least in more than a year and down from a previously reported 2 percent rate, and income gains were also cut.

Ten-year yields will end the year at 1.74 percent, according to Bloomberg surveys. They will climb to 1.85 percent in the first quarter of next year, the predictions show.

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