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U.S. 10-Year Yields Close to 7-Week High Amid Fiscal-Cliff Talks

Treasury 10-year yields traded at almost the highest level in seven weeks amid bets talks will resolve a budget showdown and as the U.S. prepared to sell $35 billion of five-year debt in the second of four note auctions this week.

U.S. government bonds remained lower for a second day after President Barack Obama rejected an alternative budget plan proposed by House Speaker John Boehner in talks to resolve a fiscal showdown. The Treasury is auctioning $113 billion in four sales that end Dec. 20.

“Even with some of the public political banter, markets still feel optimistic there will be an agreement,” said Ira Jersey, an interest-rate strategist in New York at Credit Suisse Group AG, one of the 21 primary dealers that trade with the Federal Reserve. “There has been a lot of movement over the last few days. People are still continuing to be optimistic and the base case scenario is that there will be a resolution.”

The benchmark 10-year yield increased two basis points, or 0.02 percentage point, to 1.8 percent at 12:09 p.m. New York time, according to Bloomberg Bond Trader prices. It touched 1.81 percent, the highest level since Oct. 26. The price of the 1.625 percent note due in November 2022 declined 7/32, or $2.19 per $1,000 face amount, to 98 14/32.

The five-year note yield rose one basis point to 0.74 percent after advancing earlier to 0.75 percent, the highest level since Nov. 6.

Investors in Treasuries raised bets prices of the securities will drop, resulting in the most net-short positions in the week ended yesterday since June, according to a survey by JPMorgan Chase & Co.

Net Shorts

The proportion of net shorts, or bets the securities will fall in value, was at six percentage points in the week ending yesterday, according to JPMorgan, up from four percentage points the week ended Dec. 10.

The percent of outright longs was steady at 15 percent, while the percent of outright shorts, or bets the securities will fall in value, rose to 21 percent, from 19 percent in the week ended Dec. 10, according to the survey. Investors cut neutral bets to 64 percent from 66 percent, the survey reported.

Yields rose earlier amid optimism on the budget talks in Washington. Obama’s revised plan would raise $1.2 trillion in taxes in the next decade and cut $1.22 trillion in spending, said a person familiar with the talks. Obama would accept a new inflation yardstick that would reduce Social Security cost-of-living increases, according to the person, who sought anonymity.

‘Not There’

Boehner told reporters today Obama is “not there yet” on a balanced approach. The Ohio Republican said he will push a budget “plan B” measure that will include tax increases on income of more than $1 million a year, while he continues to negotiate.

The House speaker’s plan “can’t pass the Senate and therefore will not protect middle-class families, and does little to address our fiscal challenges with zero spending cuts,” White House spokesman Jay Carney said in a statement.

More than $600 billion in tax boosts and spending cuts will automatically start taking effect in January unless an accord is reached. Failing to avert the fiscal cliff may push the economy in recession, according to the Congressional Budget Office.

One-month bill rates fell below zero for a third straight day, touching negative 0.005 percent, before trading at zero. Traders bet temporary government insurance on some bank-deposit accounts will end as scheduled on Dec. 31 after a Senate effort to extend it failed. 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.

Note Auctions

The U.S. sold $35 billion of two-year notes yesterday at a yield of 0.245 percent. The bid-to-cover ratio, which gauges demand by comparing total bids with the amount offered, was 3.59, the weakest since February. The government will sell $29 billion of seven-year debt tomorrow and $14 billion of five-year Treasury Inflation Protected Securities on Dec. 20.

The five-year notes being sold yielded 0.765 percent in pre-auction trading, compared with 0.641 percent at the previous auction of the securities on Nov. 28. The record auction low was 0.584 percent in July.

Investors bid for 2.89 times the amount of available debt at last month’s five-year sale, versus 2.73 times on Oct. 24.

“Auction performance has improved in the five-year sector recently,” Mikael Nilsson Rosell, an analyst at Barclays Plc in London, wrote in an e-mailed report. The firm is one of 21 primary dealers obliged to bid in U.S. debt auctions. “Since dropping sharply in the second quarter, the bid-cover ratio has recovered.”

Fed Purchase

The Federal Reserve bought $1.7 billion of Treasuries today maturing from February 2036 to November 2042. It will sell as much as $8 billion of government debt due between June 2015 and November 2015, according to the New York Fed’s website. The transactions are part of a program known as Operation Twist, under which the central bank replaces shorter-maturity notes in its holdings with longer-dated debt.

With that set to expire this month, the Fed will start to buy Treasuries next year in an expansion of a round of so-called quantitative easing. The new purchases don’t involve selling shorter-term securities.

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