Treasuries Advance as Republican Budget Plan Faces Veto

Treasuries rose for the first time in three days as the White House said President Barack Obama would veto a Republican budget proposal in a fiscal showdown that could push the U.S. economy into recession.

Bonds remained higher after the U.S. auctioned $29 billion in seven-year debt in the third of four note sales this week totaling $113 billion. House Speaker John Boehner pushed for a vote tomorrow on a Republican alternate budget proposal to highlight the party’s opposition to tax increases sought by Obama as the year-end budget deadline approached. The U.S. faces more than $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 10-year note yield declined two basis points, or 0.02 percentage point, to 1.8 percent at 1:08 p.m. New York time after touching 1.83 percent earlier. The yield reached 1.85 percent yesterday. The price of the 1.625 percent security maturing in November 2022 rose 1/8, or $1.25 per $1,000 face amount, to 98 13/32.

Thirty-year bond yields fell two basis points to 2.98 percent after reaching 3.03 percent yesterday.

Auction Results

The seven-year notes auctioned yielded 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 bid-to-cover ratio, which gauges demand by comparing total bids with the amount offered, was 2.72, versus a 2.75 average at the past 10 sales.

The current seven-year yield declined two basis points to 1.21 percent after touching 1.25 percent earlier.

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

Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased 23.1 percent of the notes, the most in records dating to 2009.

Seven-year notes have returned 3.2 percent this year compared with a 1.7 percent gain by Treasuries overall, according to Bank of America Merrill Lynch indexes. The seven-year securities rose 13.7 percent in 2011, while Treasuries overall advanced 9.8 percent.


The Treasury will sell $14 billion in five-year Treasury Inflation Protected Securities tomorrow. It auctioned $35 billion in two-year notes on Dec. 17 at a yield of 0.245 percent and sold the same amount of five-year debt yesterday at a yield of 0.769 percent.

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

The president told reporters later he’s open to negotiations and “eager” for a solution. He said the Republican position “defies logic.”

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 Obama to accept deeper spending cuts and a higher threshold for rate increases.

Recession Possible

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

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.

The Federal Reserve purchased $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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