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Treasuries Rise for Fourth Day Before Fiscal-Cliff Talks Begin

Nov. 13 (Bloomberg) -- Treasury 10-year notes gained for a fourth day before President Barack Obama meets Democratic and Republican leaders in Congress this week for negotiations to avert the so-called fiscal cliff.

Benchmark 10-year yields reached the lowest level in two months as European officials and the International Monetary Fund clashed about the time Greece will be given to reduce its debt levels. The Federal Reserve will buy as much as $5.25 billion of Treasuries due from 2018 to 2020 today as part of its program to replace shorter-maturity notes in its holdings with longer-dated bonds to reduce longer-term borrowing costs.

“There’s a renewed sense of despair over the fiscal cliff,” said Thomas Roth, senior Treasury trader in New York at Mitsubishi UFJ Securities USA Inc. “There are more rumblings out of Europe. Those concerns have put the flight-to-quality trade back into the market.”

The 10-year yield declined one basis point, or 0.01 percentage point, to 1.60 percent at 8:21 a.m. in New York after dropping to 1.57 percent, the lowest level since Sept. 5. The 1.625 percent note due in November 2022 rose 2/32, or 63 cents per $1,000 face amount, to 100 7/32.

The U.S. bond market was shut yesterday for Veterans’ Day.

Expensive Debt

U.S. government securities traded close to the most expensive levels in almost six weeks. The 10-year term premium, a model created by economists at the Fed that includes expectations for interest rates, growth and inflation, was negative 0.93 percent, the near the most costly since Oct. 3. A negative reading indicates investors are willing to accept yields below what’s considered fair value. The average this year is negative 0.76 percent.

Ten-year yields have fallen about 16 basis points since the Nov. 6 re-election of Obama, who supports the Fed’s plan to spur the economy through bond purchases. Obama is due to meet with Republican and Democrat leaders from the House and Senate on Nov. 16.

The fiscal cliff stems from a standoff between the President and Congress over how to curb soaring U.S. debt through a mix of tax-code changes and reduction in federal spending. Without legislation, a combined $607 billion in tax increases and spending cuts will take effect starting in January.

Political Choice

“We’re cognizant of the knee-jerk market reaction that Obama’s win raises the chance of messy fiscal negotiations and a more pro-active Fed,” said Sebastian Mackay, an investment director at Standard Life Investments Ltd. in Edinburgh. ‘However, we see this as a move to oppose.” Standard Life, which oversees $250 billion, holds fewer Treasuries than recommended in the benchmark indexes the company follows, Mackay said.

IMF Managing Director Christine Lagarde took issue with a decision by euro-area chiefs to postpone the goal of getting Greece’s debt down to a “sustainable” level of 120 percent of gross domestic product by two years, until 2022.

“Debt sustainability of Greece has to be measured in 2020,” Lagarde said yesterday. “We clearly have different views. What matters at the end of the day is the sustainability of the Greek debt.”

Treasuries pared gains after Germany’s Bild newspaper reported that the nation favored disbursing 44 billion euros ($55.9 billion) of additional aid to Greece in one payment.

Economists said a U.S. report this week will show consumer- price inflation stayed higher than Treasury yields.

U.S. consumer prices excluding food and energy gained 2 percent in October from a year ago, according to the median forecast of economists surveyed by Bloomberg News before the data is released Nov. 15. A similar gauge for producer prices climbed 2.4 percent, a separate Bloomberg survey showed before the report tomorrow.

The so-called real yield on U.S. 10-year notes, or the difference between their yield and the current rate of inflation, was minus 40 basis points, the most negative since May.

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