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Treasuries Gain a Second Day Amid Impasse Over U.S. Debt Ceiling

Jan. 14 (Bloomberg) -- Treasuries advanced for a second day as investors sought the safest assets on speculation a disagreement among U.S. political leaders over the nation’s debt ceiling will derail the economy.

Benchmark 10-year yields dropped to the lowest in a week as Senate Democratic leaders urged President Barack Obama to take any steps he can to pay U.S. financial obligations if Republicans don’t support a debt-limit increase that Democrats deem acceptable. The U.S. reached the ceiling on Dec. 31 and without an extension to the spending limit the Treasury will exhaust measures to finance the government as early as mid- February, according to the Congressional Budget Office.

“I don’t think people will be dumping Treasuries any time soon,” said Owen Callan, an analyst at Danske Bank A/S in London. Investors “will still be cautious given there is a big standoff as to how to address the spending side in the U.S.”

The benchmark 10-year yield dropped four basis points, or 0.04 percentage point, to 1.83 percent at 7:51 a.m. New York time, according to Bloomberg Bond Trader prices. The 1.625 percent note due in November 2022 rose 11/32, or $3.44 per $1,000 face amount, to 98 5/32. The yield is at the lowest level since Jan. 3.

Obama “must be willing to take any lawful steps to ensure that America does not break its promises and trigger a global economic crisis -- without congressional approval, if necessary,” Senate Majority Leader Harry Reid and three other top Democrats wrote in a letter to the president on Jan. 11.

Platinum Coin

The Democrats’ letter sharpens the dispute with Republicans over the borrowing limit. Amid Republican opposition to raising the debt ceiling without spending cuts, some Democrats have proposed invoking the Constitution’s 14th amendment and minting a platinum coin with a face value of $1 trillion.

Any setbacks over the U.S. fiscal impasse could see 10-year yields drop back to 1.70 percent, Danske Bank’s Callan said.

The Federal Reserve plans to buy as much as $1.75 billion of Treasuries maturing from February 2036 to November 2042 today, according to the website of the Fed Bank of New York.

The purchases are part of the $85 billion of government and mortgage debt the central bank is buying each month to spur the economy by putting downward pressure on interest rates.

Treasuries also rallied as economists said U.S. reports tomorrow will show retail sales rose at a slower pace in December and producer prices declined from the previous month.

Above Target

Inflation may at times run modestly above the Fed’s 2 percent target, Fed Bank of Chicago President Charles Evans said today in Hong Kong.

The difference between yields on 10-year notes and similar- maturity TIPS, a gauge of expectations for consumer prices over the life of the debt, was 2.51 percentage points. The average over the past decade is 2.19 percentage points.

Fed Chairman Ben S. Bernanke is scheduled to speak at 4 p.m. today in Ann Arbor, Michigan.

U.S. consumer prices were unchanged in December from the month before, after falling in November, according to a Bloomberg News survey before the report on Jan. 16.

“Consumer prices are under pressure,” said Hans Goetti, the Singapore-based chief investment officer for Asia at Finaport Investment Intelligence, which manages the equivalent of $1.5 billion. “Unemployment is still high. We’re going to revisit the lows in yields” for nominal bonds, he said. Finaport favors the securities over TIPS, Goetti said.

Treasuries have handed investors a loss of 0.5 percent this year through Jan. 11, according to indexes compiled by Bank of America Merrill Lynch. The gained 2.2 percent last year, the smallest annual return since 2009.

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