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U.S. 10-Year Yield Falls to 2-Month Low on Fiscal-Cliff Concern

Nov. 9 (Bloomberg) -- Treasuries rose, with 10-year yields dropping to a two-month low, amid speculation U.S. lawmakers will fail to agree on measures to avoid the so-called fiscal cliff, leading to a possible U.S. recession.

Benchmark yields headed for their biggest weekly drop since August as President Barack Obama’s re-election this week fueled bets the Federal Reserve will maintain bond purchases. Former Republican challenger Mitt Romney said he wouldn’t reappoint Fed Chairman Ben S. Bernanke. The fiscal cliff refers to more than $600 billion of tax increases and spending cuts scheduled to take effect automatically next year unless Congress acts.

“The fiscal cliff appears to be an issue” behind the rally in Treasuries, said Michael Markovich, head of global interest-rates research at Credit Suisse Group AG in Zurich. “It is also clear Mr. Bernanke will have stronger political support than he would have with a Romney win.”

The 10-year yield dropped two basis points, or 0.02 percentage point, to 1.60 percent at 7:25 a.m. in New York, according to Bloomberg Bond Trader prices. The 1.625 percent note due in November 2022 rose 6/32, or $1.88 per $1,000 face amount, to 100 9/32. The yield earlier dropped to 1.586 percent, the lowest level since Sept. 5.

The yield has declined 12 basis points this week, the most since the period ended Aug. 31.

Obama Re-Election

As Obama won re-election Nov. 6, Republicans kept control of the U.S. House of Representatives and Democrats held a majority in the Senate, raising concern the two parties will have trouble agreeing on a budget that will keep the nation out of recession.

“The flight to quality will continue,” said Hiromasa Nakamura, who helps oversee the equivalent of $41.1 billion at Mizuho Asset Management Co. in Tokyo. “Globally, stocks are declining due to concern about the fiscal cliff. It’s supportive for the fixed-income market.”

Obama backs the Fed’s plan to boost the economy through bond purchases. The central bank has bought $2.3 trillion of Treasuries and mortgage-related bonds and instituted plans to purchase $40 billion of home-loan securities a month.

The Fed is also swapping shorter-term Treasuries in its holdings with those due in six to 30 years as part of its efforts to put downward pressure on long-term borrowing costs.

The central bank is scheduled to buy as much as $1.5 billion of Treasury Inflation Protected Securities maturing from January 2019 to February 2042 today as part of the program, according to the Fed Bank of New York’s website.

‘Substantially Easier’

Academic research suggests the central bank may be providing too much stimulus to the economy, Fed Bank of St. Louis President James Bullard said yesterday.

“The current U.S. policy stance may be substantially easier than the policy stance recommended by commonly-used monetary policy feedback rules,” Bullard said in a speech in St. Louis.

The longest maturities, those most sensitive to inflation, rose the most this week. The difference between five- and 30- year yields shrank to as little as 2.10 percentage points today, the narrowest since Sept. 6.

The spread between yields on 10-year notes and similar- maturity Treasury Inflation Protected Securities, a gauge of expectations for consumer prices over the life of the debt, fell one basis point to 2.45 percentage points. Consumer prices have increased at an average rate of 2.5 percent for the past decade.

Sentiment Index

The Thomson Reuters/University of Michigan consumer sentiment index climbed to 83 this month from 82.6 in October, according to economists surveyed by Bloomberg before a preliminary reading of the gauge today. That would be the highest since September 2007.

“We’ve had some gyrations after the election with investors concerned about the extent of the fiscal cliff,” said Peter Jolly, head of market research for National Australia Bank Ltd. in Sydney. “Ultimately we expect it will be resolved, and we think we’ll see a recovery in the economy, which supports gradually higher yields.” Ten-year rates will be 2 percent at year-end, he said.

The 10-year yield will rise to 1.70 percent by the end of the year, according to a Bloomberg survey of banks and securities companies with the most recent projections given the heaviest weightings.

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