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Treasury Yields Rise Most Since October on Budget Deal

Treasuries fell, with 10-year yields rising the most in more than two months, as demand for the safest securities was curtailed by speculation a budget approved by U.S. lawmakers will sustain the economic expansion.

Yields climbed to the highest since Oct. 25 after Congress passed legislation averting income-tax increases for more than 99 percent of households, breaking an impasse about how to avert the so-called fiscal cliff. Lawmakers must next tackle the U.S. debt ceiling, which reached its $16.4 trillion limit on Dec. 31.

“People are jumping out of bonds,” said Michael Franzese, senior vice president of fixed-income trading at ED&F Man Capital Markets in New York. “Something was done and we avoided cuts and huge tax increases. This is a great buying opportunity for Treasuries. The debt ceiling now looms large.”

Benchmark 10-year yields rose eight basis points, or 0.08 percentage point, to 1.84 percent at 5 p.m. New York time, based on Bloomberg Bond Trader data. The price of the 1.625 percent security due in November 2022 declined 23/32, or $7.19 per $1,000 face amount, to 98 3/32. The yield gained as much as nine basis points, the steepest advance since Oct. 17.

The yield on the 30-year bond rose by as much as 10 basis points, the most on an intraday basis since Sept. 14.

The yield is forecast to climb to 2.2 percent at the end of the year, according to the median estimates of economists in a Bloomberg News survey, while the yield on the 30-year bond is forecast to end the year at 3.3 percent, according to a separate survey.

Term Premium

U.S. government securities traded today at the least expensive levels in more than two months. The 10-year term premium, a model created by economists at the Federal Reserve that includes expectations for interest rates, growth and inflation, touched negative 0.74 percent, the least costly since Oct. 25.

A negative reading indicates investors are willing to accept yields below what’s considered fair value. The average last year was negative 0.77 percent.

“The safety bid is being taken out of the market,” said Larry Milstein, managing director in New York of government-debt trading at R.W. Pressprich & Co. “Optimism reigns supreme.”

The yield on the benchmark 10-year note has traded in a range of 30 basis points since October, dropping from a high that month of 1.85 percent on Oct. 25 to a low of 1.55 percent on Nov. 16.

Riskier Assets

The climb in yields comes as better-than-forecast economic data led to a 3.1 percent annual gross domestic product growth rate in the third quarter, beating the 2.8 percent forecast, the Commerce Department reported Dec. 20.

Diminishing returns in the Treasury market also pushed investors into other asset classes, as the Fed purchased more of the securities, aiding the appeal of riskier assets in its efforts to strengthen the economy.

Treasuries returned 2.2 percent in 2012, the least in three years according to Bank of America Merrill Lynch indexes, as signs of improvement in the economy led investors to seek higher-yielding assets.

The MSCI All-Country World Index of stocks advanced 17 percent including reinvested dividends in 2012, according to data compiled by Bloomberg.

Debt Ceiling

Treasury yields climbed today after the House of Representatives voted in favor of the Senate’s budget legislation. While the budget measure averts most of the immediate pain of more than $600 billion in tax increases and federal spending cuts, it is only one step toward controlling the federal deficit, an issue that will return with a February fight over whether and how the debt ceiling should be raised.

The budget package passed by Congress doesn’t do enough to reduce debt growth to avoid a sovereign-rating downgrade, Moody’s Investors Service said today.

The deal doesn’t “provide a basis for a meaningful improvement in the government’s debt ratios over the medium term,” Moody’s said in a press release. Further measures are likely to be taken in the coming months that would result in lower future deficits, “which are necessary if the negative outlook on the government’s bond rating is to be returned to stable,” the ratings agency said. “Lack of further deficit reduction measures could affect the rating negatively.”

Standard & Poor’s stripped the U.S. of its top AAA rating in 2011. Since then, the yield on the 10-year Treasury note dropped to an all-time low of 1.379 percent on July 25, while the S&P 500 Index rallied 13 percent in 2012, extending the bull market rally to 111 percent since March 9, 2009.

Market Disagrees

The global bond market disagreed with Moody’s and S&P more often than not last year when the companies told investors that governments were becoming safer or more risky, with yields moving in the opposite direction from what ratings suggested in 53 percent of the 32 upgrades, downgrades and changes in credit outlook, according to data compiled by Bloomberg.

The Fed starting tomorrow will begin buying $45 billion of Treasuries a month in an expanded round of quantitative easing to lower borrowing costs and strengthen the economic recovery. The new purchases won’t involve selling shorter-term securities, ending the Operation Twist program.

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