Treasuries Gain as Reid Says Talks May Not Meet Deadline

Treasuries Head for Smallest Gain Since ’09 Before Housing Data
U.S. new-home sales advanced to a 380,000 annual rate in November, the most since April 2010. Photographer: Sam Hodgson/Bloomberg

Treasuries rose for a second day as investors sought safety after Senate Majority Leader Harry Reid said the budget stalemate that threatens to push the economy into recession probably won’t be resolved by year-end.

U.S. government bonds pared gains as House Majority Leader Eric Cantor said his chamber of Congress will convene Dec. 30 on the eve of the deadline. Treasuries reached highs of the day after Reid said on the Senate floor “nothing’s happening” on talks to avert $600 billion in tax boosts and spending cuts set to start in January. He said Republicans wouldn’t cooperate.

“It’s clear heels are dug in in Washington, and we seem to be moving further away from a resolution and closer to the possibility of going over the cliff,” said Scott Graham, head of government bond trading at Bank of Montreal’s BMO Capital Markets unit in Chicago, one of the 21 primary dealers that trade with the Federal Reserve. “The fear and worry is pushing stocks lower and Treasuries higher.”

The benchmark 10-year note yield declined two basis points, or 0.02 percentage point, to 1.74 percent at 5 p.m. in New York, according to Bloomberg Bond Trader prices. It touched 1.7 percent, the lowest level since Dec. 14, after rising earlier as much as three basis points. The price of the 1.625 percent security due in November 2022 increased 1/8, or $1.25 per $1,000 face amount, to 99.

Thirty-year bond yields fell one basis point to 2.91 percent after dropping earlier as much as five basis points.

Driving Market

“The fiscal-cliff back-and-forth is driving the market,” said Ian Lyngen, a government bond strategist at CRT Capital Group LLC in Stamford, Connecticut. “We find ourselves in an environment where the economic data is not that important in the contest of what could or could not happen in 2013, depending on how the fiscal cliff gets resolved.”

Long-bond yields reached a three-month high of 3.03 percent and 10-year yields touched a seven-week high of 1.85 percent on Dec. 18 on bets U.S. leaders would resolve the budget showdown.

The Treasury holdings of primary dealers increased 7 percent to a record $145.7 billion as of Dec. 19, the Fed reported today. Ownership of U.S. government securities has risen for four consecutive weeks by a total of $41 billion, central bank data show.

U.S. government securities returned 2.1 percent in 2012 on an annualized basis through yesterday, set for the worst performance since a 3.7 percent loss in 2009, according to Bank of America Merrill Lynch indexes. The Standard & Poor’s 500 Index gained 15 percent, including reinvested dividends, amid signs the U.S. economy is improving.

Treasuries have lost 0.2 percent this quarter and 0.6 percent this month, Merrill Lynch index data show.

Couldn’t Agree

House Speaker John Boehner and President Barack Obama were unable to agree before Christmas on the tax-rate increase on top earners that Obama sought to lower the U.S. budget deficit or the cuts to entitlement programs Boehner wanted.

“I don’t know time-wise how it can happen now,” said Reid, a Nevada Democrat. He blamed Boehner and Senate Minority Leader Mitch McConnell, both Republicans.

The House will convene the evening of Dec. 30, Cantor said in a message posted on Twitter. It may meet through Jan. 2, the Virginia Republican said. The next session of Congress is scheduled to convene the following day. The first votes on Dec. 30 are planned at about 6:30 p.m., Cantor said.

Meeting President

Democratic and Republican leaders of the U.S. House and Senate plan to meet with President Barack Obama tomorrow as the budget deadline approaches, Senator Dick Durbin said. Durbin is the second-ranking Senate Democrat.

The Congressional Budget Office has said the automatic tax increases and spending reductions would probably lead to a recession in the first half of 2013.

Treasury Secretary Timothy F. Geithner said yesterday he will take “extraordinary measures” to postpone a U.S. default into early 2013 while Obama and Congress work out a deficit-reduction deal.

“However, given the significant uncertainty that now exists with regard to unresolved tax and spending policies for 2013, it is not possible to predict the effective duration of these measures,” Geithner wrote to congressional leaders.

Moody’s Investors Service reiterated it may downgrade the U.S. next year if the government fails to address the rising percentage of debt to gross domestic product during budget negotiations. Standard & Poor’s stripped the U.S. of its top AAA rating on Aug. 5, 2011.

‘Sustainable Plan’

“Adoption of a sustainable plan that results in a declining debt ratio over the medium term would be supportive of maintaining the Aaa rating with a stable outlook,” Moody’s said in a report. “An outcome during 2013 that does not show such a debt trajectory could lead to a downgrade of the rating.”

Moody’s and S&P have negative outlooks on the U.S.

The Fed bought $4.6 billion of Treasuries maturing from December 2018 to November 2020 today, according to the Fed Bank of New York. It was part of the central bank’s effort to cap borrowing costs by exchanging short-term securities from its holdings for longer-term debt in a program that ends this month.

Treasuries erased early losses as a gauge of confidence among U.S. consumers declined more than forecast. The Conference Board’s index of sentiment fell to 65.1 in December from a revised 71.5 reading the prior month, figures from the New York-based private research group showed. A Bloomberg survey forecast a decline to 70.

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