Treasuries rallied, pushing 10-year yields down the most in six weeks, after House Republican leaders scrapped a plan to allow higher taxes as budget negotiations stalled.
Bonds remained higher, rising for a third day, even after data showed U.S. consumer spending climbed. House Speaker John Boehner’s decision to scrap the tax plan means lawmakers won’t vote until after Christmas on ending a budget-deficit showdown that may push the economy into recession. If they fail to reach an accord by year-end, more than $600 billion of automatic tax increases and spending cuts will start taking effect.
“Nobody is looking at the data, as the Treasuries move is all about the fiscal-cliff breakdown that called into question the ability to deliver an agreement before year-end,” Adrian Miller, director of fixed-income strategies in New York at GMP Securities LLC, said in a telephone interview. “There may be a last-minute deal, but there has been a notable increase in risk in the markets.”
The U.S. 10-year yield dropped three basis points, or 0.03 percentage point, to 1.76 percent at 5 p.m. New York time, according to Bloomberg Bond Trader prices. The price of the 1.625 percent security due in November 2022 gained 10/32, or $3.13 per $1,000 face amount, to 98 3/4.
The yield on the benchmark note slid as much as six basis points, the most since Nov. 7, to 1.7337 percent. It reached below its 200-day moving average of 1.7491 percent after climbing above it on Dec. 17. Moving averages are levels that are seen by some traders as turning points in the direction of a security’s price.
Today’s gain pared the 10-year note’s third weekly loss. The yield increased six basis points since Dec. 14, and it touched 1.85 percent on Dec. 18, the highest since Oct. 25.
Thirty-year bond yields decreased five basis points to 2.92 percent and touched 2.92 percent, the lowest since Dec. 17.
Treasury trading volume reported by ICAP Plc, the largest inter-dealer broker of U.S. government debt, dropped 21 percent from yesterday to $198 billion, the least in more than a week. It touched $357 billion on Dec. 18, the highest since Nov. 7. Daily volume has averaged $241 billion in 2012.
The Securities Industry and Financial Markets Association recommends that, to observe the Christmas holiday, trading stop at 2 p.m. New York time on Dec. 24 and remain closed Dec. 25.
Hedge-fund managers and other large speculators decreased their net-long position in 10-year note futures in the week ended Dec. 18, according to U.S. Commodity Futures Trading Commission data.
Speculative long positions, or bets prices will rise, outnumbered short positions by 67,142 contracts on the Chicago Board of Trade, the least since August. Net-long positions fell by 69,837 contracts, or 51 percent, from a week earlier, the Washington-based commission said in its Commitments of Traders report. It was the biggest weekly drop since March.
Large speculators increased their net-long bets on two-year note futures in the same week, CFTC data showed. Long positions outnumbered short positions by 168,622 contracts on the Chicago Board of Trade, the most since August. Net-long positions rose by 108,231 contracts, or 179 percent, from a week earlier, the commission said.
Treasuries have returned 1.8 percent this year, set for the worst annual performance since a 3.7 percent decline in 2009, according to indexes compiled by Bank of America Merrill Lynch. U.S. government securities have lost investors 0.4 percent this quarter and 0.8 percent in December.
A vote on Boehner’s plan to allow higher tax rates was canceled because of resistance from within his own Republican party, the House speaker said yesterday in a statement. Boehner told reporters today members of his Republican caucus refused to back it because they didn’t want to be accused of raising taxes.
Until Dec. 17, President Barack Obama and Boehner had been edging closer to a deal that would have included $1 trillion each in tax increases and spending cuts.
The Congressional Budget Office has said the spending reductions and tax increases set to begin next month would probably lead to a recession in the first half of 2013 if they’re not averted.
“They have essentially put the ‘if’ back into fiscal cliff, but the Treasury market reaction has been relatively moderate, which is symptomatic of the fact it’s not over yet,” said Richard McGuire, a senior rates strategist at Rabobank International in London. If a deal is reached “we should get a risk-on move which would push Treasury yields higher.”
Treasuries stayed higher even after reports suggested the U.S. economy is gathering momentum, which usually fuels appetite for riskier assets.
Purchases by U.S. consumer increased 0.4 percent last month after a 0.1 percent drop in October that was smaller than previously estimated, Commerce Department figures showed today in Washington. The gain matched the median forecast of 80 economists surveyed by Bloomberg. Incomes rebounded after being depressed in October by lost wages due to Sandy. Durable-goods orders rose 0.7 percent in November, more than forecast, the Commerce Department said in another report.
The Federal Reserve bought $1.9 billion of Treasuries today due from February 2036 to November 2042. The purchase was part of a program known as Operation Twist, under which the central bank is replacing its holdings of shorter-dated securities with longer-maturity debt to hold down borrowing costs.
The Fed will begin buying $45 billion of Treasuries a month next year in an expanded round of quantitative easing. The new purchases won’t involve selling shorter-term securities.
The Treasury sold $14 billion of inflation-linked notes yesterday at a record-low yield of negative 1.496 percent in the final of four offerings this week totaling $114 billion in nominal and inflation-indexed notes.
This week’s offerings closed the books on $2.153 trillion of government debt sales in 2012, setting a record for demand at the Treasury’s auctions for a third consecutive year.
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