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TREASURIES-Bond prices hold firm on 'fiscal cliff' jitters
November 14, 2012 / 9:03 PM / 5 years ago

TREASURIES-Bond prices hold firm on 'fiscal cliff' jitters

* Fears of Washington gridlock support bids for bonds
    * Benchmark Treasury yields hover near 10-week lows
    * Fed minutes hint openness for more bond purchases
    * U.S. retail sales fall, 1st time in three months


    By Richard Leong
    NEW YORK, Nov 14 (Reuters) - Most U.S. government debt
prices held steady on Wednesday as investors clung to their
safe-haven bond holdings on anxiety over whether a protracted
gridlock in Washington could cause a federal budget crisis that
would send the economy reeling. 
    The Treasuries market also recovered from early losses after
minutes of the Federal Reserve policy meeting in October, in
which a number of Fed officials reckoned the central bank would
need to ramp up its bond purchases to help the economy.
    President Barack Obama, who was re-elected last week,
pressed for his proposal to have the wealthy pay more in taxes
as a means to help reduce the budget deficit. Top Republican
lawmakers on the other hand have been steadfast in pushing to
hold down tax rates for top earners.
    If the White House and a divided Congress do not produce a
deal on the federal budget before year-end, a series of
automatic tax hikes and spending cuts, known as the "fiscal
cliff," are set to phase in early in 2013.
    Fears of going off the fiscal cliff have spurred selling on
Wall Street and buying in Treasuries, whose yields hovered near
10-week lows.
    Obama "is not saying anything to assure the market that
going off the fiscal cliff won't happen," said Carl Lantz, chief
U.S. interest rate strategist at Credit Suisse in New York.
    Lantz and other analysts said a budget deal is possible. 
    "I am of the opinion the (Obama) administration and Congress
will prevent a fiscal-cliff disaster from occurring," said
Wilmer Stith, co-portfolio manager of the Wilmington Broad
Market Bond Fund in Baltimore.     
    Until a budget compromise is reached, investors preferred
the safety of U.S. Treasuries over stocks, with the Standard &
Poor's 500 index down 3.8 percent over the past five
trading days. 
    Ten-year Treasury notes traded up 2/32 in price
to yield 1.589 percent, down 0.6 basis point from Tuesday's
close. They erased an early loss of 12/32 with a yield of 1.633
percent as a result of profit-taking.
    The 10-year yield touched 1.57 percent on Tuesday, which was
the lowest in 10 weeks.
    The share of investors who said on Tuesday they were "long"
U.S. government debt, or holding Treasuries more than their
portfolio benchmarks, rose to 26 percent from 17 percent the
prior week, J.P. Morgan Securities said in its weekly Treasury
client survey. 
    This was the highest level of long investors since July 23.
    While uncertainty over the U.S. budget talks and lingering
anxiety about Europe's debt crisis stoked safety bids for
Treasuries, the release of the record on the Fed's last policy
meeting was also favorable for bonds. 
    The minutes showed top Fed officials believe the third round
of large-scaled bond purchases, dubbed QE3, has helped support a
sluggish U.S. economy. They also showed a number of them thought
the central bank would need to buy more bonds when its
"Operation Twist" expires at year-end.
    "The minutes suggest they will likely add to QE3 with the
expiry of the Twist," Credit Suisse's Lantz said.
    Operation Twist involves the Fed selling short-dated
Treasuries it owns and buying $45 billion in longer-dated
Treasuries each month.
    With QE3, the U.S. central bank has been purchasing $40
billion in mortgage-backed securities each month in a bid to
bolster the housing market and lower unemployment.
    Jobs have remained tough to find for many Americans, whose
consumer spending accounts for two-thirds of the U.S. economy.
    The government reported on Wednesday that retail sales fell
0.3 percent in October, the first monthly decline since June,
due partly to superstorm Sandy that pummeled the U.S. Northeast.

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