Brian Edmonds Comments: Treasuries Yields Rise As Lawmakers Wrangle In Budget Showdown

December 22, 2012, Bloomberg News Online

Treasury 10-year note yields increased for a third consecutive week as lawmakers in Washington worked to resolve a stalemate over the budget deficit, damping demand for U.S. government debt.

The benchmark yields fell yesterday, paring the increase, after House Speaker John Boehner scrapped a plan to allow higher tax rates on income above $1 million. Without an agreement by year-end, $600 billion of tax boosts and spending cuts will start taking effect and may send the U.S. into recession, even as reports have signaled the economy is improving. The U.S. gained 140,000 jobs in December, a report Jan. 4 may show.

“Any surprising development on the fiscal cliff will cause a reaction,” said Brian Edmonds, head of interest rates at Cantor Fitzgerald LP in New York one of 21 primary dealers that trade with the Federal Reserve. “We’re at that point where we don’t expect rates to ratchet much higher. The impetus may be some deal that’s positive. The fiscal cliff is hanging over the market right now.”

The U.S. 10-year yield rose six basis points, or 0.06 percentage point, to 1.76 percent this week in New York. The yield fell three basis points yesterday, trimming the increase. The price of the 1.625 percent note due in November 2022 decreased 17/32, or $5.31 per $1,000 face amount, to 98 3/4, according to Bloomberg Bond Trader prices.

Thirty-year yields ended the week seven basis points higher at 2.93 percent after a five-basis-point drop yesterday. They reached 3.03 percent, the highest since Sept. 17, on Dec. 18.

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.

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.

A vote on Boehner’s plan to allow higher tax rates was canceled Dec. 20 because of resistance from within his own Republican party, the House speaker said in a statement. 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 to lower the budget deficit.

“The fiscal cliff is up to politics,” Steven Ricchiuto, chief economist at Mizuho Securities USA Inc. in New York, said in a telephone interview on Dec. 20. “There’s a 60 percent probability that they will come up with something with very few details. They will kick the can down the road.”

The Congressional Budget Office has said the automatic spending reductions and tax increases set to begin next month unless lawmakers reach an accord would probably lead to a recession in the first half of 2013.

The Treasury sold $14 billion in five-year inflation-linked notes at a record-low negative yield Dec. 20 as the stalemate spurred demand for refuge. The Treasury Inflation Protected Securities yielded negative 1.496 percent.

“It’s not the return, it’s the purpose,” William Larkin, a fixed-income money manager who helps oversee $500 million at Cabot Money Management Inc. in Salem, Massachusetts, said that day in an interview.

TIPS holders receive an adjustment to the principal value of their securities equal to the change in the consumer price index, in addition to a fixed rate of interest that’s smaller than what’s paid to a holder of conventional debt. The fixed payment on five-year TIPS was pushed below zero as the rise in the CPI was greater than the yield on regular U.S. notes, which fell with other Treasury yields as investors sought safety.

The government sold $113 billion in coupon-bearing debt this week: TIPS; $35 billion in two-year securities Dec. 17 at a yield of 0.245 percent; an equal amount in five-year debt the next day at a yield of 0.769 percent; and $29 billion in seven- year notes Dec. 19 at 1.233 percent.

The week’s offerings closed the books on $2.153 trillion of government debt sales in 2012 that set a record for demand. The Treasury attracted $3.15 in bids for each dollar of the notes and bonds it sold, surpassing last year’s bid-to-cover ratio of 3.04 and the 2010 mark of 2.99.

Treasuries also fell this week as reports suggested the U.S. economy is gathering momentum.

Third-quarter U.S. gross domestic wwwuct expanded 3.1 percent, more than the highest projection in a Bloomberg survey and compared with the previous estimate of a 2.7 percent gain, the Commerce Department reported Dec. 20. The median forecast of economists called for 2.8 percent.

Consumer spending increased 0.4 percent last month after a 0.1 percent drop in October, and durable-goods orders rose 0.7 percent, other Commerce Department reports showed.

U.S. employers will add almost as many jobs to payrolls in December, according to economists in a Bloomberg survey before the Labor Department reports the data next month, as the 146,000 new hires in November.

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.