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Treasuries Rally for First Time in Four Days as U.S. CPI Falls

Treasuries rose for the first time in four days as consumer prices fell, a sign inflation is in check even as the Federal Reserve prepares to expand bond buying, and no progress was reported on a U.S. budget standoff.

Thirty-year bonds led the rally even as U.S. industrial production climbed. U.S. four-week bill rates turned negative for the first time since January. The Fed bought $1.98 billion in Treasuries due from 2036 to 2042. President Barack Obama and House Speaker John Boehner met for a third time at the White House yesterday to discuss averting the so-called fiscal cliff of automatic spending cuts and tax boosts at year-end.

“You can’t look at anything and say we have an inflation problem,” said Thomas Roth, senior Treasury trader in New York at Mitsubishi UFJ Securities USA Inc. “That gives them the cover to continue to do what they are doing. The market is totally dominated by Fed buying.”

The 30-year bond yield dropped four basis points, or 0.04 percentage point, to 2.86 percent at 5 p.m. New York time, according to Bloomberg Bond Trader prices. It touched 2.93 percent yesterday, the highest level since Nov. 2. The price of the 2.75 percent security due in November 2042 gained 26/32, or $8.13 per $1,000 face amount, to 97 23/32.

The yield on the 10-year note decreased three basis points to 1.7 percent after rising earlier to 1.75 percent, the highest level since Nov. 7.

Net Longs

Hedge-fund managers and other large speculators decreased their net-long position in 10-year note futures in the week ending Dec. 11 from the highest since 2008, according to U.S. Commodity Futures Trading Commission data.

Speculative long positions, or bets prices will rise, outnumbered short positions by 136,979 contracts on the Chicago Board of Trade. Net-long positions fell by 65,712 contracts, or 32 percent, from a week earlier, when they rose to 202,691, the most since March 2008, according to the Washington-based commission’s Commitments of Traders report.

Treasuries rose today as Labor Department data showed the consumer price index fell 0.3 percent last month, more than forecast, in the first drop since May. The median estimate in a Bloomberg survey was for a 0.2 percent decline.

The difference in yields between 10-year notes and Treasury Inflation Protected Securities, known as the 10-year break-even rate, narrowed to 2.46 percentage points, from 2.51 on Dec. 12, the most in five weeks. The gap signals traders’ outlook for consumer prices over the life of the securities.

“I don’t think inflation will be a concern in the near-term,” said Justin Lederer, an interest-rate strategist at Cantor Fitzgerald LP in New York, one of 21 primary dealers that trade with the Fed.

Weekly Losses

Treasuries pared weekly losses today. Thirty-year bond yields increased five basis points since Dec. 7, and 10-year yields rose eight basis points.

The extra yield investors demand to hold 30-year bonds instead of two-year notes, the yield curve, shrank to 263 basis points after touching 266 basis points yesterday, the most since Oct. 25. The spread reached a 2012 high of 310 basis points on March 19 and a low for the year of 224 basis points on July 25.

The government will sell $113 billion of notes next week: $35 billion in two-year debt, an equal amount of five-year securities, $29 billion in seven-year notes and $14 billion in five-year Treasury Inflation Protected Securities. The auctions will be on four consecutive days beginning Dec. 17.

Operation Twist

The Fed bought Treasuries today as part of its Operation Twist program to push down borrowing rates. It will purchase as much as $9 billion next week of bonds due from 2036 to 2042 and from 2023 to 2031. The four operations begin Dec. 18.

Policy makers said Dec. 12 the central bank will buy $45 billion of U.S. government debt each month from January in addition to $40 million in monthly mortgage-bond purchases it’s already making. The expansion will follow the expiration at year-end of Operation Twist, a $667 billion program in which the central bank has sold about $45 billion in short-term Treasuries each month and bought an equal amount of longer-term debt.

The U.S. four-week bill rate dropped below zero today as traders speculated temporary government insurance on some bank-deposit accounts will end as scheduled on Dec. 31. That would trigger a flow of several hundred billion dollars into Treasury bills, repurchase agreements and money funds that purchase government securities, according to Fed primary dealers including Bank of America Corp.

The rate touched negative 0.005 percent after rising to 0.1876 percent on Nov. 23, the highest level since 2009. It last traded negative, meaning investors pay the government to hold their cash safely, on Jan. 9.

Extension Fails

The Senate failed yesterday to move forward on a two-year extension of the Transaction Account Guarantee program. Introduced in the wake of the 2008 credit crisis, the program guarantees $1.5 trillion in non-interest-bearing transaction accounts that exceed the Federal Deposit Insurance Corp.’s general limit of $250,000.

Boehner and Obama met for almost an hour yesterday, with no public announcement of progress on a resolution of the stalemate that the Congressional Budget Office has said may push the world’s biggest economy into recession.

“It’s getting harder and harder to think we’ll get a deal done,” Mitsubishi UFJ’s Roth said.

Treasuries gained today even after a report showed industrial production in the U.S. rose in November by the most in two years as manufacturers recovered from superstorm Sandy.

Output at factories, mines and utilities increased 1.1 percent after a revised 0.7 percent drop in October that was more than initially estimated, the Fed reported.

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