December 10, 2012 / 9:18 PM / 5 years ago

TREASURIES-Prices edge higher on Washington budget worries

* No visible signs of progress in 'fiscal cliff' impasse
    * Doubts on whether Italy will continue economic reforms
    * U.S. Treasury to sell $66 billion of debt this week

    By Chris Reese
    NEW YORK, Dec 10 (Reuters) - U.S. Treasury debt prices edged
higher on Monday as investors worried about budget battles in
Washington, but a push for price concessions ahead of $66
billion in government debt sales this week kept gains modest.
    Political rumblings in Italy and expectations for further
monetary policy easing by the Federal Reserve when it meets this
week also helped boost Treasury prices.
    U.S. lawmakers have yet to report substantial progress in
talks meant to avert a package of automatic tax hikes and budget
cuts set to kick in automatically at the start of the year.
    With time running out for Congress and President Barack
Obama to reach an agreement, the pace of talks has begun to pick
up although neither side gave ground in public. 
    Economists fear the looming "fiscal cliff" of $600 billion
worth of tax increases and spending cuts could send the U.S.
economy back into recession if it is not averted. 
    Nor was the news abroad any more calming. 
    In Italy, Prime Minister Mario Monti on Saturday said he
would resign once the budget for 2013 was approved. Monti was
trusted by investors to bring down Italy's huge debt and is
credited with stabilizing the country's bond markets.
    But former Prime Minister Silvio Berlusconi's center-right
party withdrew support for Monti last week, and Berlusconi said
he could run to become premier for a fifth time.
    His comment raised fears that Monti's successor may not
continue his economic reforms and Italy could again come to the
forefront of the euro zone debt crisis. 
    Treasuries were supported by "the prospect of more Fed
buying and global uncertainties and very weak growth/recession
forecasts into 2013, not to mention the fiscal cliff," said
Richard Gilhooly, interest rate strategist at TD Securities in
New York. 
    Benchmark 10-year Treasury notes were trading 
3/32 higher in price to yield 1.615 percent, from 1.62 percent
late Friday, while 30-year bonds were 8/32 higher to
yield 2.796 percent, compared with Friday's 2.81 percent.
    The Treasury will sell $32 billion of three-year notes on
Tuesday, $21 billion of 10-year notes on Wednesday and $13
billion of 30-year bonds on Thursday. Investors often move to
undercut prices heading into such auctions.
    "With the lack of data today, the market will focus on the
equity market direction, news of the fiscal cliff, and the
set-up for this week's supply of three-year, 10-year and 30-year
paper," said Tom di Galoma, managing director at Navigate
Advisors LLC in Stamford, Connecticut.
    A better-than-expected November U.S. jobs report on Friday
did little to alter expectations that the Federal Reserve is
likely to muster some additional bond-buying plans at its
two-day meeting that begins on Tuesday. 
    Many investors expect the Fed at the close of the meeting to
announce it will buy $45 billion per month of longer-dated
Treasuries beginning in January to replace the current Operation
Twist stimulus program that expires at the end of December.
    Under Operation Twist, the central bank is selling
shorter-dated U.S. government debt and buying longer-dated
Treasuries to extend the duration of its balance sheet. Analysts
say the Fed has few shorter-dated Treasuries left to sell but is
very likely to continue buying longer-dated debt next year,
which would expand the central bank's balance sheet.

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