Treasuries Fluctuate as U.S. Fiscal-Cliff Deadline Near

Senate Minority Leader Mitch McConnell
Private talks between Senate Majority Leader Harry Reid and Minority Leader Mitch McConnell, seen here, that began Dec. 28 stalled yesterday because of disputes over income tax rates, the estate tax and other issues. Photographer: Pete Marovich/Bloomberg

Treasuries fluctuated as Democrat and Republican lawmakers have just hours left to agree on a budget deal that both sides say is necessary to prevent a blow to the nation’s economy.

U.S. government securities gave up their first-place rank among world bonds in 2012 as signs of improvement in the global economy cut demand for the safety of Treasuries. Benchmark notes rose last week as lawmakers failed to reach agreement to avoid the so-called fiscal cliff of more than $600 billion in spending cuts and tax increases set to start tomorrow. Allowing those changes to take effect would cause a recession in the first half of 2013, according to the Congressional Budget Office.

“We’ve had a pretty significant move in Treasuries in the past few days,” said Owen Callan, an analyst at Danske Bank A/S in Dublin. “The market got quite complacent and assumed a deal would be done a lot earlier. It does appear that the two parties are still some way apart but I still think they will come up with some kind of deal or stopgap. Both sides recognize the danger of not coming to an agreement.”

The 10-year yield was little changed at 1.70 percent at 7:37 a.m. in New York, according to Bloomberg Bond Trader prices. The 1.625 percent note due in November 2022 was at 99 11/32. Ten-year yields declined six basis points last week.

Talks Stall

Private talks between Senate Majority Leader Harry Reid and Minority Leader Mitch McConnell that began Dec. 28 stalled yesterday because of disputes over income tax rates, the estate tax and other issues. McConnell, a Kentucky Republican, approached Vice President Joe Biden in an effort to break the impasse, while staff worked into the night reviewing offers.

Reid said the chamber will resume work on the budget today.

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 number one.

The U.S. added 150,000 jobs in December, versus November’s 146,000, according to a Bloomberg News survey of economists before the Labor Department reports the figure on Jan. 4. The jobless rate held at 7.7 percent, the least since 2008, the surveys showed.

Manufacturing Expands

An index of manufacturing climbed to 50.3 this month from 49.5, based on a separate survey of economists before the Jan. 2 report. A reading of 50 marks the dividing line between expansion and contraction in the Institute for Supply Management’s gauge.

“The U.S. economy is recovering,” said Park Sungjin, the head of asset management at Meritz Securities Co. in Seoul, which oversees the equivalent of $7 billion. “This is a good chance to set a short position,” he said, referring to trades that benefit if bonds fall.

Park said he may add to a short position on five-year U.S. note futures contracts he entered this month.

The Federal Reserve said on Dec. 12 it is concerned there won’t be sustained improvement in the U.S. labor market without support from the central bank.

Policy makers said they will buy $45 billion of Treasuries a month at least as long as unemployment is more than 6.5 percent and inflation between one and two years ahead is expected to be no more than 2.5 percent.

The Fed is also purchasing $40 billion of mortgage-backed securities each month, and ending its maturity-extension program known as Operation Twist. Central-bank buying helped push the 10-year yield to a record low this year, with the rate falling to 1.379 percent on July 25.

Pacific Investment Management Co.’s Bill Gross, who runs the world’s biggest bond fund, wrote on Twitter yesterday he expects stocks and bonds to return less than 5 percent in 2013.

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

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