BLBG:Treasuries Fall on Fiscal Cliff Talks, Before 5-Year Note Sale
Treasuries fell, sending benchmark yields to the highest level in almost two months, amid speculation talks are progressing in Washington on how to avoid the so-called fiscal cliff that threatens to send the U.S. economy into recession.
Five-year yields rose to a six-week high before the government sells the notes today as part of its $113 billion offering planned this week. Demand for the safety of Treasuries was damped after President Barack Obama was said to propose a tax-rate threshold of $400,000 in negotiations to avoid automatic tax increases and spending cuts.
“An agreement on the fiscal cliff is likely to bring down the bond market a bit more,” said Tomohisa Fujiki, an interest- rate strategist in Tokyo at BNP Paribas SA. “Because of the hectic auction schedule, we’re seeing the heavy load of bond supply weighing on the market.”
The benchmark 10-year rate touched 1.79 percent, the highest since Oct. 26, and was up one basis point at 1.78 percent as of 6:42 a.m. in London. The 1.625 percent security due in November 2022 dropped 1/16, or 63 cents per $1,000 face amount, to 98 19/32.
The five-year note yield was little changed at 0.74 percent after earlier reaching 0.75 percent, the highest since Nov. 6.
Japan’s 20-year bond yields added as much as three basis points to 1.74 percent, a level unseen since April 9, according to Japan Bond Trading Co., the nation’s largest inter-dealer debt broker. An auction of the securities today drew bids valued at 3.11 times the amount on offer, the lowest so-called bid-to- cover ratio since August.
Budget Negotiations
Obama made a new budget offer that would raise taxes by $1.2 trillion and lift tax rates for households earning more than $400,000 a year, up from a previous threshold of $250,000, said a person familiar with the talks. The president and House Speaker John Boehner are negotiating to avert more than $600 billion in tax increases and spending cuts set to start in January.
The U.S. is scheduled to sell $35 billion of five-year notes today, $29 billion of seven-year debt tomorrow and $14 billion of five-year Treasury Inflation Protected Securities on Dec. 20.
The five-year notes scheduled for sale today yielded 0.76 percent in pre-auction trading, rising from 0.641 percent at the previous sale of the securities on Nov. 28.
Investors bid for 2.89 times the amount of available debt last month, compared with the average of 2.9 for the previous 10 auctions. Primary dealers bought 38.8 percent of the securities, the least since April 2010.
‘Lower Demand’
“We call for an unspectacular auction, with a lower demand profile versus recent auctions,” Nomura Holdings Inc. analysts, led by George Goncalves, head of interest-rate strategy in New York, wrote in a research note yesterday.
The Federal Reserve will buy as much as $2.25 billion of Treasuries today maturing from February 2036 to November 2042 and sell up to $8 billion of government debt maturing from June 2015 to November 2015, according to the New York Fed’s website. The transactions are part of the program known as Operation Twist, under which the central bank replaces shorter-maturity notes in its holdings with longer-dated debt.
With the program set to expire this month, the Fed will start to buy U.S. government bonds next year in a new program of so-called quantitative easing that doesn’t involve selling shorter-term securities. Fed Bank of Dallas President Richard Fisher, scheduled to speak today, said last week that the central bank “may never be able” to exit its unprecedented bond-buying program.
U.S. gross domestic product probably expanded an annualized 2.8 percent in the three months ended Sept. 30, compared with the previously reported 2.7 percent growth, according to the median estimate of economists surveyed by Bloomberg News. The Commerce Department will release the updated figure on Dec. 20.
“The U.S. economy isn’t in full swing, and the moderate recovery will continue,” said BNP’s Fujiki.“ Because of the Fed’s strong commitment, shorter yields will remain low.”
To contact the reporter on this story: Masaki Kondo in Singapore at mkondo3@bloomberg.net
To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net
