Bonds rise on US bud­get talks, Is­rael wor­ries

The Pak Banker - - Front Page -

NEW YORK:

US gov­ern­ment debt prices rose on Fri­day with yields touch­ing their low­est lev­els in over two months on scep­ti­cism over whether Wash­ing­ton will pro­duce a deal to avoid a bud­get cri­sis and wor­ries about fight­ing be­tween Is­rael and the Pales­tini­ans.

The bond mar­ket’s gains were capped by sta­bi­liza­tion in Wall Street stocks which have been pum­meled by fears that US Pres­i­dent Barack Obama and Congress will fail to reach a timely com­pro­mise to avoid the ‘fis­cal cliff’, a se­ries of au­to­matic tax hikes and spend­ing cuts which would phase in in early 2013.

Such a se­vere move could stun the US econ­omy back into re­ces­sion, ac­cord­ing to many economists.

“There’s a lot of fears with the fis­cal cliff and the Mid­dle East,” said Charles Comiskey, head of Trea­sury trad­ing at the Bank of Nova Sco­tia in New York. “Trea­suries continue to be a safe­haven se­cu­rity. A lot of money is pour­ing in here.”

The bullish tone in Trea­suries was also sup­ported by data show- ing US in­dus­trial out­put un­ex­pect­edly fell 0.4 per cent in Oc­to­ber due to Sandy, a deadly storm that dis­rupted busi­nesses along the East Coast, al­though the trend was con­sis­tent with slow­ing man­u­fac­tur­ing ac­tiv­ity.

Bench­mark 10-year Trea­sury notes rose 6/32 in price at 10015/32, yield­ing 1.574 per cent, down 2 ba­sis points on late Thurs­day.

The 10-year yield was on track to fall for a fourth straight week, touch­ing 1.556 per cent ear­lier, which was only 17 ba­sis points above its record low set in late July.

Ma­jor US stock in­dexes re­bounded from their ini­tial losses, al­though the Stan­dard & Poor’s 500 in­dex has fallen more than 4 per cent lower over the past two weeks.

On Fri­day, top law­mak­ers from both ma­jor US po­lit­i­cal par­ties spoke af­ter a meet­ing at the White House, hint­ing at the pos­si­bil­ity of a bud­get com­pro­mise that in­volves spend­ing cuts and ad­di­tional rev­enue, al­though they were short on de­tails.

Some an­a­lysts saw en­cour­ag­ing signs a deal will emerge with- in six weeks be­fore the “fis­cal cliff” starts to kick in, while oth­ers were doubt­ful that the Democrats and Republicans were close to a com­pro­mise about rais­ing taxes and re­duc­ing so­cial pro­grams in­clud­ing Medi­care.

Some an­a­lysts be­lieve Wash­ing­ton will likely come up with an agree­ment that pro­vides short-term fixes to the most con­tentious is­sues on taxes and spend­ing so they could buy time to ne­go­ti­ate longer-term deficit re­duc­tion goals.

“A grand bar­gain is just as hard to at­tain as it was eigh­teen months ago. A lesser bar­gain is more likely, which will ap­pease both sides,” said Guy LeBas, chief fixed-in­come strate­gist at Jan­ney Mont­gomery Scott in Philadel­phia.

While US law­mak­ers sought to com­fort fi­nan­cial mar­kets, the fight­ing be­tween Is­raelis and Pales­tini­ans kept in­vestors on edge with signs of grow­ing mo­bi­liza­tion on both sides.

In­vestors also watched developments in Greece whose in­ter­na­tional lenders have been squab­bling over how to keep the heav­ily in­debted na­tion sol­vent.

While anx­ious in­vestors have flocked into Trea­suries to shield their cash from the uncer­tain­ties in Wash­ing­ton, Europe and the Mid­dle East, some strate­gists cau­tioned against hold­ing an ex­ces­sive amount of US gov­ern­ment debt whose longer-dated yields are barely keep­ing up with in­fla­tion.

“There’s a real yield deficit,” said Dan Heck­man, se­nior fixed in­come strate­gist at US Bank Wealth Man­age­ment in Min­neapo­lis. He rec­om­mended in­vestors hold high-qual­ity cor­po­rate and mu­nic­i­pal bonds for their higher yields.

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