Treasuries Advance on Fiscal-Cliff Doubts, U.S. Growth Concern

Treasuries rose for the third week since the U.S. presidential elections as concern increased that U.S. policy makers will fail to avert the so-called fiscal cliff and risk pushing the U.S. economy into a recession.

Benchmark 10-year note yields dropped to the lowest level in more than a week a day after the U.S. completed the final of three note auctions totaling $99 billion, drawing strong demand. U.S. debt extended gains after a report showed a measure of prices tied to spending, a gauge preferred by the Federal Reserve, advanced at a rate less than the central bank’s target. The Fed acquired $1.85 billion in Treasuries today.

“It’s about the fiscal cliff; it’s all about not reaching a deal,” said Adrian Miller, director of global-market strategy at GMP Securities LLC in New York. “It’s about eliminating the acute negative impact on the economy.”

The yield on the benchmark 10-year traded at 1.62 percent at 5 p.m. in New York, according to Bloomberg Bond Trader prices. The 1.625 percent note due in November 2022 was at 100 3/32.

The yield is down eight basis points this week, the fifth decline in the past six weeks and the third time since the Nov. 6 presidential elections.

Miller said he expects the 10-year yield to trade between 1.5 percent and 1.8 percent during the next month.

The U.S. Treasury Master returned 0.5 percent this month through yesterday, the first gain since July, while an index of investment-grade and high-yield debt was little changed, according to Bank of America Merrill Lynch data. Treasuries have returned 2.6 percent this year, down from 9.8 percent last year, according to the indexes.

Index Matching

Government debt was supported as some investors bought debt to increase the duration of their portfolios to match benchmarks at the end of the month, such as the Barclays Plc U.S. Treasury Index. Duration measures price sensitivity to changes in yield, and is partly a function of maturity.

The Barclays U.S. Treasury index is projected to extend by 0.07 year for November, the most since extending by 0.08 year in August, according to the firm.

“There’s a fairly sizable extension, so you will see decent month-end index switching,” 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 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.”

Fed Policy

The central bank 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. It bought $16.8 billion this week in six operations.

More than $600 billion of tax increases and automatic spending cuts are scheduled to start in January if no deal on the so-called fiscal cliff is reached. President Barack Obama warned of “prolonged negotiations” ahead, while House Speaker John Boehner said “right now, we’re almost nowhere” in the negotiations.

“Our sense is that we are no closer to a deal than we were two weeks ago,” said Ian Lyngen, a government-bond strategist at CRT Capital Group LLC in Stamford, Connecticut. “The primary issue at hand is the fiscal cliff and the likelihood that any budget agreement negatively affects gross domestic product in 2013,”

The Congressional Budget Office has warned that if Congress doesn’t avert the fiscal cliff, the economy might slip into recession next year.

Economic Data

Today’s Commerce Department report showed a measure of prices tied to consumer spending advanced 1.7 percent in October from the same month last year, less than the Fed’s long-run goal of 2 percent. Excluding food and energy costs, the personal consumption expenditures index price gauge increased 1.6 percent from a year earlier.

The difference in yields between 10-year notes and TIPS rose to 2.42 percentage points, the most since Nov. 21. The gap, known as the 10-year break-even rate, is down from 2.7 percentage points on Sept. 17, the most since May 2006.

Volatility in Treasuries dropped yesterday to the lowest in five years. Bank of America Merrill Lynch’s MOVE index, which measures price swings based on options, matched the 51.7 basis points recorded Nov. 27, the lowest level of price swings 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.

Trading Level

Treasury trading volume dropped yesterday to $247.4 billion from $281.5 billion Nov. 28 that was the most in three weeks, according to ICAP Plc, the largest inter-dealer broker of U.S. government debt. The 2012 daily average is $240 billion.

The government sold $29 billion in seven-year notes yesterday as direct bidders purchased a record 19.7 percent of the notes, compared with an average of 14.4 percent at the past 10 auctions. The U.S. sold $35 billion in five-year securities the previous day with direct bidders winning 15.9 percent of the offering, the most since 2004.

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