Treasuries fell for the first time in five days on speculation U.S. lawmakers will agree to a compromise to avert the so-called fiscal cliff of spending cuts and higher taxes.
Ten-year yields climbed from near a two-month low after Treasury Secretary Timothy F. Geithner said yesterday it was “deeply implausible” that Republicans, who control the House of Representatives, would trigger the $607 billion of automatic tax increases and reduced federal spending. Treasuries also dropped as Cisco Systems Inc. (CSCO) reported quarterly profit that exceeded analysts’ estimates, damping demand for safer assets.
“There’s less of a negative view on the fiscal cliff given that we’ve had some moves indicating both parties are increasingly willing to strike a compromise,” said Michael Leister, a fixed-income strategist at Commerzbank AG in London. “We had moved to the bottom of the range in 10-year yields and it was clear that in the absence of really negative news, we would see a pullback” in Treasuries, he said.
The benchmark 10-year yield rose two basis points, or 0.02 percentage point, to 1.62 percent at 6:43 a.m. in New York, according to Bloomberg Bond Trader prices. The 1.625 percent note due in November 2022 fell 6/32, or $1.88 per $1,000 face amount, to 100 3/32. The yield dropped to 1.57 percent yesterday, the lowest level since Sept. 5.
‘Very Encouraging’
Geithner said he is optimistic Republicans want to reach an agreement, speaking at the Wall Street Journal’s CEO Council meeting in Washington.
“It’s very encouraging that you’ve seen the leadership just in these last couple of days recognize that we’re going to have to generate a modest amount of additional revenues from high- income Americans,” he said.
The Congressional Budget Office has forecast the fiscal cliff would push the economy into a recession next year.
Cisco, the biggest maker of computer networking equipment, said profit excluding some costs was 48 cents a share in the quarter ended Oct. 27, in a statement yesterday. That compares with analysts’ average estimate for 46 cents a share, according to data compiled by Bloomberg. Standard & Poor’s 500 Index futures advanced 0.4 percent.
Kei Katayama, who invests in U.S. government debt in Tokyo for Daiwa SB Investments Ltd., said he’s betting officials will avoid the fiscal cliff.
“It may take a little bit of time but there will be some kind of compromise, and yields will go up,” said Katayama, who helps manage the equivalent of $62.5 billion at the unit of Japan’s second-biggest brokerage.
Higher Yields
Treasury 10-year yields will climb to 2.04 percent by June 30, according to a Bloomberg survey of financial companies with the most recent projections given the heaviest weightings.
Federal Reserve Bank of Dallas President Richard Fisher said U.S. policy makers can’t loosen policy infinitely.
“I do not see us as that safety net” in the event that Congress fails to reach an agreement on the fiscal cliff, Fisher said in an interview on CNBC. “We just can’t continue down the road of an infinite expansion of monetary policy.”
Fisher, who doesn’t vote on the policy-setting Federal Open Market Committee this year, has been among the most vocal critics of further easing within the central bank. The committee last month voted to continue buying $40 billion in mortgage bonds per month until the employment outlook improves.
Fed Sales
The Fed is also swapping short-term Treasuries in its holdings with those due in six to 30 years to put downward pressure on borrowing costs. The central bank plans to sell as much as $8 billion of securities due from May 2015 to June 2015 today, according to the Fed Bank of New York’s website.
The Fed is scheduled to issue the minutes of its October meeting today. Policy makers said last month they would “undertake additional asset purchases” if the outlook for the labor market doesn’t improve “substantially,” raising speculation the central bank will buy more Treasuries.
Economists said a report today will show wholesale prices rose at the slowest pace since June.
The producer price index climbed 0.2 percent in October after a 1.1 percent gain in August, the Labor Department will say, according to median estimate in a Bloomberg News survey of 73 economists. Retail sales fell 0.2 percent in October, following a 1.1 percent gain in September, according to a separate Bloomberg survey.
The difference between yields on 10-year notes and similar- maturity inflation-linked bonds, a gauge of expectations for consumer prices, was little changed at 2.43 percentage points after shrinking to 2.4 percentage points, the narrowest since Sept. 13.
To contact the reporters on this story: Lukanyo Mnyanda in Edinburgh at lmnyanda@bloomberg.net; Wes Goodman in Singapore at wgoodman@bloomberg.net
To contact the editor responsible for this story: Paul Dobson at pdobson2@bloomberg.net
