BLBG:Treasury Yields Climb to Seven-Week High on Fiscal-Cliff Talks
Treasury 10-year yields climbed to the highest level in seven weeks amid speculation talks are progressing in Washington on avoiding the so-called fiscal cliff that threatens to send the economy into recession.
Five-year yields reached the most in six weeks before the government sells $35 billion of the securities today, in the second of four auctions of notes and bonds this week for a total of $113 billion. President Barack Obama lowered his tax revenue demand by $200 billion and offered to start tax-rate increases at $400,000 in income instead of $250,000, in talks yesterday with House Speaker John Boehner.
“We had news on the fiscal cliff overnight that brought optimism and pressure on Treasuries,” said Michael Leister, a fixed-income strategist at Commerzbank AG in London. “To get a really substantial and sustained move I guess we would need some clear indications or details to show we’re approaching a deal. Selling pressure on Treasuries didn’t last too long.”
The benchmark 10-year yield was little changed at 1.77 percent at 10:56 a.m. London time, according to Bloomberg Bond Trader prices. The yield increased to 1.79 percent, the highest level since Oct. 26. The price of the 1.625 percent note due in November 2022 was 98 23/32.
The 10-year rate will rise to around 2.20 percent by the end of 2013, Leister forecasts.
The five-year yield was little changed at 0.73 percent after earlier reaching 0.75 percent, the highest since Nov. 6.
Obama’s revised plan would raise $1.2 trillion in taxes in the next decade and cut $1.22 trillion in spending, said a person familiar with the talks. Obama would accept a new inflation yardstick that would reduce Social Security cost-of- living increases, said the person, who sought anonymity.
‘Heavy Load’
Boehner and Majority Leader Eric Cantor will give House Republicans an update on the negotiations today, said a leadership aide who requested anonymity.
“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 fiscal cliff refers to the more than $600 billion in tax increases and spending cuts that will start taking effect in January unless Congress acts. Tax rates for income at all levels will rise, along with taxes on estates, capital gains and dividends.
U.S. Sales
The U.S. sold $35 billion of two-year notes yesterday. It will sell $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, compared with 0.641 percent at the previous auction of the securities on Nov. 28.
Investors bid for 2.89 times the amount of available debt last month, compared with 2.73 times on Oct. 24.
“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 between February 2036 and November 2042 and sell up to $8 billion of government debt due between June 2015 and November 2015, according to the New York Fed’s website. The transactions are part of a program known as Operation Twist, under which the central bank replaces shorter- maturity notes in its holdings with longer-dated debt.
Quantitative Easing
With that set to expire this month, the Fed will start to buy U.S. government bonds next year in a new round 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 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: Lucy Meakin in London at lmeakin1@bloomberg.net; Masaki Kondo in Singapore at mkondo3@bloomberg.net
To contact the editor responsible for this story: Paul Dobson at pdobson2@bloomberg.net.
