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Treasuries Drop on Bets Congress May Reach Budget-Deficit Deal

Treasuries fell for the first time in four days as speculation congressional negotiators will resolve a budget-deficit showdown by the midnight deadline damped demand for the safety of U.S. government debt.

Bonds remained lower after President Barack Obama said Congress is “close” to a deal to avoid the so-called fiscal cliff of more than $600 billion in automatic spending cuts and tax increases set to start taking effect tomorrow. Those changes would cause a recession in the first half of 2013, according to the Congressional Budget Office. The yield on the 10-year note still had its lowest year-end close on record.

“Though time is running out, the market is holding on to the eternal hope there will be some kind of deal, and that optimism is pushing yields higher,” said Aaron Kohli, an interest-rate strategist in New York at BNP Paribas SA, one of 21 primary dealers that trade with the Federal Reserve. “If something doesn’t happen, that optimism will quickly dissipate.”

The 10-year yield increased six basis points, or 0.06 percentage point, to 1.76 percent at 2 p.m. in New York, according to Bloomberg Bond Trader prices. The yield exceeded its 200-day moving average of 1.74 percent. It fell earlier to 1.69 percent, reaching for a second day its 100- and 50-day moving averages. Yields declined six basis points last week.

The price of the 1.625 percent note due in November 2022 slid 1/2, or $5 per $1,000 face amount, to 98 26/32.

Thirty-year bond yields climbed eight basis points to 2.95 percent.

Early Closing

Treasury trading in the U.S. stopped at 2 p.m. New York time today and will be closed tomorrow for New Year’s Day, according to the Securities Industry and Financial Markets Association website.

Obama said an agreement by lawmakers to avert the fiscal cliff is “not done.” He said he’s “hopeful” Congress will reach a deal to prevent tax increases, while the deficit can be tackled in stages.

The 10-year note yield dropped from 1.88 percent at the end of 2011. Economists had forecast it would end 2012 at 2.5 percent, according to the median forecast in a Bloomberg News survey published on Jan. 12. The yield touched a record daily low of 1.379 percent on July 25.

The yield’s close today was the lowest on a year-end basis since at least 1962, according to data compiled by Bloomberg. The current year-end record low is last year’s 1.88 percent.

The 10-year yield reached a historic year-end high of 13.98 percent in 1981 in part because then Federal Reserve Chairman Paul Volcker had raised interest rates in 1980 to 20 percent to battle inflation. The yield is forecast to end 2013 at 2.17 percent, according to a Bloomberg News survey of economists.

Gross Outlook

Pacific Investment Management Co.’s Bill Gross, manager of the world’s biggest bond fund, expects Treasury five-year notes to yield 0.7 percent at the end of 2013, he wrote today in a Twitter post. The note yielded 0.72 percent today.

Newport Beach, California-based Gross also said he expects the dollar to decline and oil to climb above $100 next year. Oil traded today at $91.54 a barrel, and the greenback gained 0.2 percent to $1.3191 per euro. Gross wrote in a post yesterday he expects stocks and bonds to return less than 5 percent next year as unemployment persists at 7.5 percent or higher.

Treasuries due in 10 years and longer returned 4.9 percent in 2012, the 113th best performer of 144 debt indexes tracked by Bloomberg and the Federation of Financial Analysts Societies. Last year, the securities surged 29 percent to rank No. 1.

Annual Returns

U.S. government securities returned 2.3 percent this year through Dec. 28, the lowest since losing 3.7 percent in 2009, according to Bank of America Merrill Lynch data. Gains were tempered as safety demand declined on bets Europe was handling its debt crisis and as U.S. economic data improved.

U.S. investment-grade corporate debt has returned 11 percent this year and high-yield debt has gained 16 percent, Merrill Lynch indexes show, as companies took advantage of borrowing costs that fell as the Fed kept interest rates near zero for a fourth year to prop up the economy.

“We’ve been through 30 years of a bull market in fixed-income,” said David Ader, head of U.S. government-bond strategy at CRT Capital Group LLC in Stamford, Connecticut. “The type of returns the bond market has provided over the last 30 years is not going to be seen. Mathematically it just can’t happen.”

U.S. mortgage-backed securities have gained 2.6 percent in 2012, another Merrill Lynch index showed, as returns were limited by higher refinancings.

Treasuries fluctuated earlier amid uncertainty on lawmakers’ ability to reach a budget agreement.

Talks ‘Progressing’

Senate Majority Leader Harry Reid said negotiators could reach a U.S. budget deal today.

“They’re progressing,” Reid, a Nevada Democrat, said of the talks in an interview as he entered the Capitol this morning. Asked if he thought a deal could be reached today, Reid said, “I really hope so. We’re not there yet, though.”

Talks between Reid and Senate Minority Leader Mitch McConnell stalled yesterday because of disputes over income tax rates, the estate tax and other issues.

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