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Treasuries Rise as Obama Says Fiscal Cliff Proposal Not Enough

Treasury 10-year notes rose as the Federal Reserve bought U.S. government debt and President Barack Obama said that a Republican offer on averting the so-called fiscal cliff doesn’t go far enough.

Yields approached the lows for the day after Obama, in a Bloomberg Television interview, said House Speaker John Boehner’s proposal won’t raise the revenue needed to shrink the deficit by $4 trillion over the next decade. The Fed purchased $1.87 billion of Treasuries are part of its program to keep borrowing rates low to spur economic growth.

“The market is being held hostage,” said Sean Murphy, a trader at Societe General SA in New York, one of the 21 primary dealers that are required to bid at government debt auctions. “The fiscal cliff, and the potential that we may drive off it is too much for the market to ignore, and so it’s keeping Treasuries supported in a very tight range.”

Ten-year note yields fell almost two basis points, or 0.02 percentage point, to 1.60 percent at 5 p.m. New York time, according to Bloomberg Bond Trader data. The price of the 1.625 percent security due in November 2022 rose 5/32, or $1.56 per $1,000 face amount, to 100 6/32.

Yields rose earlier after the approval of an aid payment for Spain’s banks spurred optimism that Europe is containing its debt crisis and undermined demand for the safest assets.

Investors in Treasuries cut bullish bets this week, resulting in the fewest net longs since June, according to a survey by JPMorgan Chase & Co.

Short Bets

The proportion of net shorts was at four percentage points in the week ending yesterday, according to JPMorgan, compared with four percentage net longs in the week ending Nov. 26. Neutral bets remained steady at 70 percent, equaling the highest level since August.

Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., said structural headwinds may reduce real economic growth below 2 percent in the U.S. and other developed nations. He reiterated that U.S. inflation-protected securities remain attractive and advised avoiding longer-maturity Treasuries because central bank policies to revive growth will lead to inflation.

“The biblical metaphor of seven years of fat leading to seven years of lean may be quite apropos in the current case with the observation that the developed world’s growth binge has been decades in the making,” Gross wrote in his monthly investment outlook posted on the Newport Beach, California-based company’s website today. “We may need at least a decade for the healing.”

Yield Forecasts

Treasuries have returned 2.6 percent this year through yesterday, while bonds in an index of U.S. investment-grade and high-yield debt rallied 11 percent, according to Bank of America Merrill Lynch data.

Economists cut their forecasts for Treasury 10-year yields this year to the lowest since Bloomberg began surveying for the projection with U.S. politicians struggling to reach consensus on a plan to avert more than $600 billion in automatic spending cuts and tax increases for 2013. Forecasters also reduced their predictions for the rate through 2013.

The 10-year yield will be 1.64 percent by Dec. 31, less than the 1.75 percent rate that economists saw at the start of November, according to Bloomberg surveys of the predictions. The rate will climb to 2.27 percent by the end of 2013, a separate survey shows, down from a forecast of 2.35 percent on Nov. 1.

The average forecast for the 10-year Treasury yield fell as low as 1.59 percent at the end of last week.

Trading Range

“We’re going to have to have higher rates for the wealthiest,” Obama said today. “It’s just a matter of math.”

The U.S. president said he’s willing to make further cuts in entitlements and realizes he won’t get “100 percent” of what he wants.

“If the President really wants to avoid sending the economy over the fiscal cliff, he has done nothing to demonstrate it,” Boehner said in statement. Obama must offer plan that “can pass both chambers of Congress.”

Ten-year yields were confined to the tightest range since 2007 last month as volatility dropped to a five-year low, data compiled by Bloomberg shows. Treasury 10-year rates were in a range of 22 basis points last month, according to data compiled by Bloomberg, the narrowest since April 2007.

“Treasuries have gotten a small bid as the stock market has rolled over a little and we got the Fed buyback,” said Larry Milstein, managing director in New York of government-debt trading at R.W. Pressprich & Co. “The market is very constrained by the Fed on perma-hold and the fiscal cliff dominating headlines. Everyone is waiting for some resolution.”

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