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Treasuries Rise for Fourth Day on Debt-Limit Talks

Jan. 16 (Bloomberg) -- Treasuries rose for a fourth day on speculation political wrangling between President Barack Obama and lawmakers over the U.S. debt ceiling will curb economic growth, fueling demand for the safety of debt.

Ten-year yields touched the lowest level in two weeks as the World Bank cut its global-growth forecast, saying austerity and high unemployment will weigh on developed nations. U.S. government debt remained higher after a report showed inflation remains at bay, allowing the Federal Reserve to add monetary stimulus without triggering a surge in prices. The Fed bought $1.47 billion of Treasuries as part of its program to cap borrowing costs.

“We’re facing this showdown on the debt ceiling,” said Kevin Giddis, head of fixed-income at Raymond James in Memphis, Tennessee. “Treasuries have rallied on the thought that this has the potential to look like 2011 again. The market is setting up for a pretty active fight between the president and the House.”

Yields dropped to a record low 1.379 percent in July 2012 from 2.56 percent on Aug. 5, 2011, even after Standard & Poor’s downgraded the U.S.

The benchmark 10-year note yield dropped two basis points, or 0.02 percentage points, to 1.82 percent at 5 p.m. in New York, according to Bloomberg Bond Trader prices. The 1.625 percent note due in November 2022 rose 5/32, or $1.56 per $1,000 face amount, to 98 1/4. The yield touched 1.80 percent, the lowest since Jan. 2.

Volatility Drops

Volatility in Treasuries dropped yesterday close to an almost 25-year low. Bank of America Merrill Lynch’s MOVE index, which measures price swings based on options, touched 53 basis points, up from 51 basis points on Dec. 3, the lowest level of price swings since April 1988. It hit a 2012 high of 95.4 basis points on June 15. Volatility climbed to 264.6 basis points in October 2008 as the financial crisis intensified.

The 30-year bond yield today fell one basis point to 3.01 percent after touching 2.98 percent, the least since Jan. 2.

“There are no buyers of the bond inside of 3 percent --the Fed’s the only buyer,” Thomas Tucci, managing director and head of Treasury trading in New York at CIBC World Markets Corp. “No one chases the market on an uptrade because, I still think, in the back of people’s minds they think rates are gradually going to creep higher over time.”

Thirty-year yields will increase to 3.30 percent by Dec. 31, according to a Bloomberg survey of financial companies, with the most recent projections given the heaviest weightings.

Costly Debt

This week’s rally has made U.S. government securities the most expensive in two weeks. The 10-year term premium, a model created by economists at the Fed that includes expectations for interest rates, growth and inflation, was negative 0.77 percent today, the least since Jan. 1.

A negative reading indicates investors are willing to accept yields below what’s considered fair value.

With as little as a month until the U.S. runs out of money to pay its bills, President Barack Obama and Republicans in Congress remain at odds on raising the debt ceiling. Many Republicans say a boost in borrowing authority must be linked to spending cuts.

The Treasury Department has been using emergency measures since the end of December to prevent a breach of the $16.4 trillion debt limit. The U.S. government makes about 80 million payments each month, including for Social Security, veterans’ benefits, defense contractors, law enforcement and income-tax refunds.

‘More Uncertainty’

Exhausting the extraordinary steps without raising the limit would require it to fund the government with cash on hand, which wouldn’t be adequate “for any meaningful length of time,” according to Treasury Secretary Timothy F. Geithner.

Since 1960, Congress has raised or revised the limit 79 times.

“Investors should buy on dips in prices,” said Larry Milstein, managing director in New York of government-debt trading at R.W. Pressprich & Co. “As we come into the fiscal-cliff debate, there will be more uncertainty and rates should rally. So buying the dip is the way to go.”

The World Bank yesterday lowered its global-growth forecast for this year to 2.4 percent, from a June prediction of 3 percent. It halved its estimate for Japan, cut the U.S. projection by 0.5 percentage point and forecast a second year of contraction in the euro region.

Fed Buying

The unchanged reading in the consumer-price index in December matched the median estimate of 83 economists surveyed by Bloomberg and followed a 0.3 percent drop the prior month, Labor Department data showed today in Washington. Costs rose 1.7 percent in 2012, the third-smallest annual gain in the past decade and down from a 3 percent increase in 2011.

The Fed’s purchases of Treasuries due from February 2036 to November 2042 today are part of its program to buy $85 billion in government and mortgage debt each month to stimulate the economy.

“The continuation of Fed policy will not stop purchases anytime soon,” said Brian Edmonds, head of interest rates at Cantor Fitzgerald LP in New York, one of 21 primary dealers that trade with the Fed.

Japan raised its holdings of U.S. debt to $1.13 trillion as of October from $1.06 trillion at the end of 2011, and is on pace to again become the largest U.S. creditor since slipping to second place in September 2008. China owns $1.17 trillion.

To contact the reporters on this story: Susanne Walker in New York at swalker33@bloomberg.net; Daniel Kruger in New York at dkruger1@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

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