By Cynthia Lin
U.S. Treasury prices fell Wednesday, setting the market up for its third consecutive losing session after seeing seven days of gains in a row.
Investors are unwinding some of the postelection buying, when concerns about a set of year-end U.S. fiscal deadlines grew after President Barack Obama won re-election on Nov. 6. The runup in Treasury prices from Nov. 7 to last Friday was sharp, taking the 10-year yield as low as 1.55%. The market was closed on Nov. 12 for Veterans Day.
"Lawmakers and Obama have signaled a 'trust me' stand, and markets have become guardedly optimistic" that a deal will be reached, said Robert Tipp, chief investment strategist at Prudential Fixed Income. He says the 1.5% to 1.6% yield range on 10-year notes reflected overbought conditions. "Treasurys were really set up for a fender bender coming into this week."
Mr. Tipp expects Treasurys to settle into a more stable trading range around 1.7% on 10-year notes.
Traders say there are still plenty of buyers looking at the safe-haven market because anxieties are still very much alive about Washington's ability to avert the fiscal cliff--a set of spending programs and tax cuts due to expire at the end of the year. Without an agreement, economists say the cliff could easily wipe out economic growth in the coming year.
"We expect a steep economic slowdown to occur as a result of the fiscal cliff and the very real possibility that everyone in America will be paying higher taxes in 2013," said Tom di Galoma, managing director at broker-dealer Navigate Advisors. "We are of the view that employment worsens and retail spending slows substantially."
In recent trading, Treasurys added to losses seen since the start of the week. Benchmark 10-year notes recently fell 7/32 in price to yield 1.680% and 30-year bonds lost 10/32 to yield 2.825%. Two-year notes shed 1/32 to yield 0.270%. Bond yields rise when prices fall.
This selling came even as Greece's next bailout package remains undecided and U.S. consumers were reported feeling less upbeat.
Euro-zone finance ministers and International Monetary Fund officials concluded a nearly 12-hour meeting still divided on some details about terms to Greece's funding. The group reconvenes Monday.
Meanwhile, the Reuters/University of Michigan index on consumer sentiment fell to 82.7 this month, from an initial read of 84.9. Separately, a weekly claims reports showed an elevated 410,000 new applications for jobless benefits, the first time in over a year that figure held above 400,000 for two straight weeks.
Still ahead, the U.S Treasury plans to sell $13 billion in 10-year inflation-protected notes. Results of the auction are due at 11:30 a.m. EST.
Nomura Securities' rate strategists expect the sale to fare well as the inflation-protected version of the 10-year has cheapened relative to its nominal counterparts. This can be seen in the 10-year breakeven rate, the difference between their two yields. The rate has fallen to 2.40 percentage points from 2.67 on Sept. 14, the day after the Federal Reserve announced its open-ended mortgage bond-buying program.
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