By William L. Watts, MarketWatch
FRANKFURT (MarketWatch) — U.S. Treasurys rallied on Friday, as equities slumped and investors sought safe havens after House Republican leaders failed to muster support among their own party on a tax bill, stoking fears politicians won’t be able to avert the fiscal cliff.
The yield on 10-year Treasury notes 10_YEAR -2.28% fell nearly 5 basis points to 1.76%, while the yield on the 30-year Treasury bond 30_YEAR -1.44% dropped 5 basis points to 2.94%. A basis point is 1/100th of a percentage point. Yields fall as bond prices rise.
Yields slightly extended their slide after data showed U.S. consumer spending rose 0.4%, income jumped and durable goods orders exceeded forecasts.
“With ‘Plan B’ by House Speaker [John] Boehner not even reaching the floor for a vote, due to lack of Republican support, it is now very unlikely that new legislation to avoid the fiscal cliff will be introduced before Dec. 31,” wrote fixed-income strategists at Lloyds Bank in London.
Boehner is scheduled to hold a news conference on Friday morning.
U.S. stock futures pointed to a sharply lower for Wall Street, while European and Asian equities slumped in the wake of the developments. See: Stock futures slump after GOP abandons tax vote .
Unless politicians act, around $600 billion in spending cuts and tax hikes are set to begin taking effect on Jan. 1. Economists fear that would tip the U.S. back into recession and drag global economic growth down along with it.
Pessimists contend that failure to reach a deal between President Barack Obama and congressional Republicans could potentially send equities sharply lower, stoking demand for safe-haven assets such as Treasurys. See: How deep is the cliff dive for stocks?
The Lloyds strategists, however, argued that cautious market optimism over prospects for a compromise may remain intact even if a final deal doesn’t materialize by year-end. “But as we move toward February, the lack of an agreement and fears of brinkmanship about the debt limit may well induce another downswing in yields,” they wrote.
William L. Watts is MarketWatch's European bureau chief, based in Frankfurt. Follow him on Twitter @wlwatts.
