Bloomberg News

Treasuries Gain for Third Day as Fiscal Cliff Concern Increases

November 09, 2012

Treasury 10-year yields fell for a third day following the re-election of President Barack Obama as investor concern increases that political gridlock may derail chances of an economic recovery.

The benchmark yield has been pushed down as voters returned the president, a Democrat, to the White House and backed a Republican majority to the House of Representatives. Obama invited Democratic and Republican leaders in Congress to the White House next week to begin negotiations to avert the so- called fiscal cliff -- $607 billion in automatic spending cuts and tax increases scheduled to take effect starting in January.

“It’s going to be a bumpy ride going into the end of the year,” said Ward McCarthy, chief financial economist at Jefferies & Co. Inc. in New York, one of the 21 primary dealers that trade with the Federal Reserve. “The market reaction to the elections was that it’s not good for risk assets, so because that’s the case, the market flew back into Treasuries.”

The 10-year yield declined one basis point, or 0.01 percentage point to 1.61 percent at 5 p.m. in New York, according to Bloomberg Bond Trader prices. The 1.625 percent note due in November 2022 rose 2/32 or 63 cents per $1,000 face value to 100 5/32. The yield earlier dropped to 1.578 percent, the lowest level since Sept. 5.

The yield declined 11 basis points this week.

After Voting

“We’ve had a pretty good move since the Obama victory,” said Thomas Roth, senior Treasury trader in New York at Mitsubishi UFJ Securities USA Inc. The market has backed up as “we’ve run a long way.”

U.S. government securities traded at the most expensive levels in five weeks. The 10-year term premium, a model created by economists at the Fed that includes expectations for interest rates, growth and inflation, reached negative 0.94 percent, the most costly since Oct. 3. A negative reading indicates investors are willing to accept yields below what’s considered fair value. The average this year is negative 0.76 percent.

The difference between the yields on two-year and 10-year notes, the so-called yield curve, narrowed to as little as 132 basis points, the least since Sept. 5. Historically, a so-called flatter yield curve reflects higher demand from investors anticipating slower economic growth and inflation.

Pimco’s Shift

Bill Gross, who runs the world’s biggest bond fund, increased his holdings of Treasuries for the first time since April as traders increased bets that the Fed would add to stimulus measures.

Gross raised the proportion of U.S. government and Treasury debt at Pacific Investment Management Co.’s $281 billion Total Return Fund to 24 percent of assets last month, from 20 percent in September, according to a report on the Newport Beach, California-based company’s website. Mortgages remained the fund’s largest holding at 47 percent, down from 49 percent a month earlier. Pimco doesn’t comment directly on monthly changes in its portfolio holdings.

The Thomson Reuters/University of Michigan’s preliminary index of consumer sentiment for November increased to 84.9 from 82.6 the prior month. Economists projected a reading of 82.9 for the gauge, according to the median forecast of 71 economists surveyed by Bloomberg.

Obama won re-election Nov. 6 amid concern the two parties will have trouble agreeing on a budget that will keep the nation out of recession.

Budget Plans

“The American people voted for action,” Obama said today at the White House, giving his first public remarks on the budget and deficit since winning re-election Nov. 6. He again said any solution must include spending cuts and raising revenue, including raising taxes on the wealthiest.

House Speaker John Boehner called for a “simpler, cleaner, fairer tax code,” staking out the Republican position before Obama spoke.

Obama backs the Fed’s plan to boost the economy through bond purchases. The central bank has bought $2.3 trillion of Treasuries and mortgage-related bonds and instituted plans to purchase $40 billion of home-loan securities a month.

The Fed is also swapping shorter-term Treasuries in its holdings with those due in six to 30 years as part of its efforts to put downward pressure on long-term borrowing costs.

Fed Buys

The central bank purchased $1.4 billion of Treasury Inflation Protected Securities maturing from January 2019 to February 2042 today as part of the program, according to the Fed Bank of New York’s website.

The 10-year yield will rise to 1.70 percent by the end of the year, according to a Bloomberg survey of banks and securities companies with the most recent projections given the heaviest weightings.

Hedge-fund managers and other large speculators decreased their net-long position in 10-year note futures in the week ending Nov. 6, according to U.S. Commodity Futures Trading Commission data.

Speculative long positions, or bets prices will rise, outnumbered short positions by 110,357 contracts on the Chicago Board of Trade. Net-long positions fell by 59,099 contracts, or 35 percent, from a week earlier, the Washington-based commission said in its Commitments of Traders report.

To contact the reporter on this story: 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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