Treasury Yields Drop as Budget Talks Stall While Deadline Looms

Treasury 10-year yields fell from an almost seven-week high on concern U.S. officials are failing to make progress resolving a fiscal showdown that could push the U.S. economy into recession.

The yields pared declines after the U.S. sold $29 billion of seven-year notes in the sixth auction of coupon-bearing debt in seven trading days. A year-end budget deadline loomed as the White House threatened to veto a Republican plan that may face a vote tomorrow in a move to highlight the party’s opposition to tax increases. The U.S. faces $600 billion in automatic spending cuts and tax boosts if officials can’t reach an agreement.

“That’s encouraged further buying,” said Christopher Sullivan, who oversees $2.1 billion as chief investment officer at United Nations Federal Credit Union in New York. “Positions certainly seem to have hardened from here, which makes a solution that much more difficult to achieve.”

The benchmark 10-year note yield fell two basis points, or 0.02 percentage point, to 1.8 percent at 5 p.m. New York time after dropping four basis points earlier to 1.77 percent. The yield reached 1.85 percent yesterday, the highest since Oct. 25. The price of the 1.625 percent security maturing in November 2022 gained 1/8, or $1.25 per $1,000 face amount, to 98 13/32.

Thirty-year yields declined one basis point to 2.99 percent after sliding to as low as 2.95 percent. They touched 3.03 percent yesterday, a three-month high.

Volume Falls

Treasury volume reported by ICAP Plc, the largest inter-dealer broker of U.S. government debt, fell 18 percent to $292 billion. It was $357 billion yesterday, the most since Nov. 7. Daily volume has averaged $241 billion in 2012.

Volatility in Treasuries reached the highest level in six weeks yesterday. Bank of America Merrill Lynch’s MOVE index, which measures price swings of U.S. government securities based on options, rose to 63 basis points, the most since Nov. 6. The 2012 average is 70.3.

President Barack Obama told reporters he offered congressional Republicans a “fair deal” during budget talks and accused them of “posturing” in negotiations.

Obama would veto an alternate proposal by House Speaker John Boehner because it would put “too big a burden on the middle class,” White House Communications Director Dan Pfeiffer said in a statement.

Boehner’s “Plan B” would raise tax rates on income over $1 million, rather than the $400,000 Obama proposed in his latest offer. The House speaker is looking to pressure the president to accept deeper spending reductions and a higher threshold for rate increases.

The spending cuts and tax boosts that are set to begin in January without an accord could push the world’s biggest economy into recession, the Congressional Budget Office has said.

Auction ‘Icing’

The Treasury sold $165 billion of notes and bonds in offerings that started on Dec. 11.

“People can only buy so much until the fiscal-cliff negotiations are wrapped up, or at least have a fairly certain direction,” said Jim Vogel, head of agency-debt research at FTN Financial in Memphis, Tennessee. “The auctions were sort of the icing on this week’s bad cake.”

The seven-year note sale drew a yield of 1.233 percent, compared with a forecast of 1.242 percent in a Bloomberg News survey of six of the Federal Reserve’s 21 primary dealers.

The auction’s bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 2.72, versus a 2.75 average at the past 10 sales.

‘Decent Auction’

“It’s a decent auction,” said Jason Rogan, director of U.S. government trading at Guggenheim Partners LLC a New York-based brokerage for institutional investors. “It came right on the screws.”

Indirect bidders, an investor class that includes foreign central banks, bought 39.9 percent of the notes, compared with an average of 40.4 percent at the past 10 offerings.

Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased 23.1 percent, the most in records dating to 2009. The average over the past 10 sales was 15.2 percent.

The current seven-year note yield declined one basis point to 1.22 percent.

The government will sell $14 billion in five-year Treasury Inflation Protected Securities tomorrow, bringing this week’s note sales to $113 billion.

The U.S. auctioned $35 billion in five-year securities yesterday, with direct bidders winning 30.4 percent of the offering, the most since 2004. At the Dec. 17 offering of $35 billion in two-year debt, direct bidders bought 28.4 percent of the securities, the second-highest amount since 2003, when the Treasury started releasing the data.

Last Week

The Treasury sold $13 billion of 30-year bonds on Dec. 13, $21 billion of 10-year notes on Dec. 12 and $32 billion of three-year debt on Dec. 11.

The Fed bought $1.9 billion of Treasuries today due from February 2036 to November 2042 under Operation Twist. The program, which expires at year-end, is replacing shorter-maturity notes in the central bank’s holdings with longer-term debt to hold down borrowing costs.

The central bank will begin buying $45 billion of Treasuries a month next year in an expanded round of quantitative easing. The new purchases don’t involve selling shorter-term securities.

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