U.S. 10-Year Yields Reach Seven-Week High on Fiscal-Cliff Talks

Treasury 10-year yields touched the highest level in seven weeks amid speculation talks are progressing in Washington to resolve a budget showdown that threatens to send the economy into recession.

U.S. government securities fluctuated before the Treasury sells $35 billion of five-year debt in the second of four note sales this week totaling $113 billion. President Barack Obama, in talks yesterday with House Speaker John Boehner, lowered his tax revenue demand by $200 billion and offered to start tax-rate increases at $400,000 in income instead of $250,000.

“Treasuries are reacting to the continued progress on Washington negotiations,” said Jim Vogel, head of agency-debt research at FTN Financial in Memphis, Tennessee. “Markets like the middle-ground tone being struck.”

The benchmark 10-year yield increased two basis points, or 0.02 percentage point, to 1.79 percent at 9:06 a.m. New York time, according to Bloomberg Bond Trader prices. It was the highest level since Oct. 26. The price of the 1.625% note due in November 2022 declined 5/32, or $1.56 per $1,000 face amount, to 98 1/2.

The five-year note yield traded at 0.74% after rising earlier to 0.75%, the highest level since Nov. 6. It slipped to as low as 0.72%.

Investors in Treasuries raised bets prices of the securities will drop, resulting in the most net-short positions in the week ended yesterday since June, according to a survey by JPMorgan Chase & Co.

The proportion of net shorts, or bets the securities will fall in value, was at six percentage points in the week ending yesterday, according to JPMorgan, up from four percentage points the week ended Dec. 10.

The percent of outright longs was steady at 15%, while the percent of outright shorts, or bets the securities will fall in value, rose to 21%, from 19% in the week ended Dec. 10, according to the survey. Investors cut neutral bets to 64% from 66%, the survey reported.

Yields rose earlier amid optimism on the budget talks in Washington. Obama’s revised plan would raise $1.2 trillion in taxes in the next decade and cut $1.22 trillion in spending, said a person familiar with the talks. Obama would accept a new inflation yardstick that would reduce Social Security cost-of- living increases, according to the person, who sought anonymity.

Boehner, who agreed last week to accept higher taxes on annual household income above $1 million, told reporters today that while Obama is “not there yet” on a balanced approach, the talks will continue. He said a backup approach is needed to prevent tax increases.

More than $600 billion in tax boosts and spending cuts will automatically start taking effect in January unless Congress acts. Failing to avert the fiscal cliff may push the economy in recession, according to the Congressional Budget Office.

One-month bill rates fell below zero for a third straight day, touching negative 0.005% before rising to 0.005. Traders bet temporary government insurance on some bank-deposit accounts will end as scheduled on Dec. 31 after a Senate effort to extend it failed. That would trigger a flow of several hundred billion dollars into Treasury bills, repurchase agreements and money funds that purchase government securities, according to Fed primary dealers including Bank of America Corp.

The U.S. sold $35 billion of two-year notes yesterday at a yield of 0.245%. The bid-to-cover ratio, which gauges demand by comparing total bids with the amount offered, was 3.59, the weakest since February. The government will sell $29 billion of seven-year debt tomorrow and $14 billion of five-year Treasury Inflation Protected Securities on Dec. 20.

The five-year notes being sold yielded 0.76% in pre-auction trading, compared with 0.641% at the previous auction of the securities on Nov. 28. The record auction low was 0.584% in July.

Investors bid for 2.89 times the amount of available debt at last month’s five-year sale, versus 2.73 times on Oct. 24.

“Auction performance has improved in the five-year sector recently,” Mikael Nilsson Rosell, an analyst at Barclays Plc in London, wrote in an e-mailed report. The firm is one of 21 primary dealers obliged to bid in U.S. debt auctions. “Since dropping sharply in the second quarter, the bid-cover ratio has recovered.”

The Federal Reserve will buy as much as $2.25 billion of Treasuries today maturing between February 2036 and November 2042 and sell as much as $8 billion of government debt due between June 2015 and November 2015, according to the New York Fed’s website. The transactions are part of a program known as Operation Twist, under which the central bank replaces shorter- maturity notes in its holdings with longer-dated debt.

With that set to expire this month, the Fed will start to buy Treasuries next year in an expansion of a round of so-called quantitative easing. The new purchases don’t involve selling shorter-term securities.