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Treasuries Erase Losses as U.S. Fiscal Cliff Concern Lingers

December 04, 2012

Treasury 10-year notes erased losses on concern negotiations over the so-called fiscal cliff between President Barack Obama and Republican lawmakers are stalled, spurring demand for refuge.

The benchmark note yields rose earlier after the approval of an aid payment for Spain’s banks spurred optimism that Europe is containing its debt crisis and undermined demand for the safest assets. Obama and the Republicans are trading offers on ways to avoid the so-called fiscal cliff of more than $600 billion in spending cuts and tax increases for 2013.

“We are going to be focused on any comments on the fiscal cliff or Europe,” said Jason Rogan, director of U.S. government trading at Guggenheim Partners LLC a New York-based brokerage. “People are looking to see if a much bigger bailout ends up being asked for. Washington will make the markets nervous for the foreseeable future.”

Ten-year note yields were little changed at 1.62 percent at 8:55 a.m. New York time, according to Bloomberg Bond Trader data. The rate dropped to 1.59 percent on Nov. 30, the lowest since Nov. 19. The price of the 1.625 percent security due in November 2022 rose 1/32, or 31 cents per $1,000 face amount, to 100 2/32.

Investors in Treasuries cut bullish bets this week, resulting in the fewest net longs since June, according to a survey by JPMorgan Chase & Co.

Short Bets

The proportion of net shorts was at four percentage points in the week ending yesterday, according to JPMorgan, compared with four percentage net longs in the week ending Nov. 26. Neutral bets remained steady at 70 percent, equaling the highest level since August.

Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., said structural headlines may reduce real economic growth below 2 percent in the U.S. and other developed nations. He reiterated that U.S. inflation- protected securities remain attractive and advised avoiding longer-maturity Treasuries because central bank policies to revive growth will lead to inflation.

“The biblical metaphor of seven years of fat leading to seven years of lean may be quite apropos in the current case with the observation that the developed world’s growth binge has been decades in the making,” Gross wrote in his monthly investment outlook posted on the Newport Beach, California-based company’s website today. “We may need at least a decade for the healing.”

Trading Slows

Treasuries have returned 2.6 percent this year, while bonds in an index of U.S. investment-grade and high-yield debt rallied 11 percent, according to Bank of America Merrill Lynch data.

Treasury trading volume dropped yesterday to $173 billion, lower than the 2012 daily average of $240 billion, according to ICAP Plc, the largest inter-dealer broker of U.S. government debt. It touched $281.5 billion on Nov. 28 that was the most in three weeks.

The European Stability Mechanism’s board approved a first tranche of aid for Spanish banks, Luxembourg Prime Minister Jean-Claude Juncker said yesterday in Brussels. The disbursement will be made next week, he said.

Finance ministers also set a Dec. 13 meeting to release the next 34.4 billion euros ($45 billion) of aid for Greece and possibly wrap up bailout talks with Cyprus, which would become the fifth euro-area country to tap international aid since the crisis erupted in late 2009.

Economists cut their forecasts for Treasury 10-year yields this year to the lowest since Bloomberg began surveying for the projection on concern U.S. politicians are struggling to avert the fiscal cliff. Forecasters also reduced their predictions for the rate through 2013.

Yield Forecasts

The 10-year yield will be 1.64 percent by Dec. 31, less than the 1.75 percent rate that economists saw at the start of November, according to Bloomberg surveys of the predictions. The rate will climb to 2.27 percent by the end of 2013, a separate survey shows, down from a forecast of 2.35 percent on Nov. 1.

The average forecast for the 10-year Treasury yield fell as low as 1.59 percent at the end of last week.

“It’s a fiscal-cliff forecast,” said Rob Carnell, chief international economist at ING Groep NV in London, who predicts the 10-year note yield will decline to 1.50 percent by the end of the year and 1.40 percent in the first quarter of 2013. “We expect that there isn’t going to be a deal by December 31st and that will benefit Treasuries. Once we’ve got a resolution, yields will rise.”

House Republicans rejected Obama’s demand for tax-rate increases, heightening the confrontational tone of budget negotiations. They proposed $1.4 trillion in spending cuts and $800 billion in new revenue by limiting tax breaks and capping deductions for top earners. The proposal did not include higher tax rates for top-earning Americans, something Obama has called essential.

Narrow Range

Ten-year yields were confined to the tightest range since 2007 last month as volatility dropped to a five-year low, data compiled by Bloomberg shows. Treasury 10-year rates were in a range of 22 basis points last month, according to data compiled by Bloomberg, the narrowest since April 2007.

Bank of America Merrill Lynch’s MOVE index, which measures price swings of U.S. government securities based on options, fell to 51.7 basis points on Nov. 27 and Nov. 29, the lowest level since May 2007. It hit a 2012 high of 95 basis points on June 15. Volatility climbed to 265 basis points in October 2008 as the financial crisis intensified.

To contact the reporter on this story: Susanne Walker in New York at

To contact the editor responsible for this story: Dave Liedtka at

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