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Treasurys head for lowest average annual yield amid stalemate

Dec. 26 (Bloomberg) -- Treasurys rose, pushing 10-year yields toward the lowest average annual yield on record, as U.S. leaders prepared to resume talks on a budget stalemate that may push the world’s biggest economy into recession.

The yield gap between U.S. 10- and two-year notes shrank to the least in almost two weeks even after data showed home prices climbed in October by the most since 2010. President Barack Obama plans to return to Washington as a year-end deadline looms to avert more than $600 billion in automatic tax increases and spending cuts. The Federal Reserve will add $45 billion of Treasurys to its monthly asset purchases starting next month.

“You’ve got the fiscal cliff pulling yields down, the Fed buying bonds as far as the eye can see holding yields down,” said Richard Gilhooly, an interest-rate strategist at Toronto- Dominion Bank’s TD Securities unit in New York.

Benchmark U.S. 10-year yields fell two basis points, or 0.02 percentage point, to 1.75 percent at 11:56 a.m. in New York, according to Bloomberg Bond Trader prices. They have averaged 1.79 percent this year, the lowest on record. The price of the 1.625 percent security maturing in November 2022 rose 6/32, or $1.88 per $1,000 face value, to 98 27/32.

The 10-year yield has climbed from the record low of 1.38 percent reached in July. It compares with the average of 3.66 percent for the past decade.

Two-year Treasurys yielded 0.27 percent. The gap in yield between two- and 10-year notes was 1.49 percentage points, the least on a closing basis since Dec. 14.

Yield curve

The yield difference, called a yield curve, plots the rates of bonds of the same quality but different maturities. It steepens when yields on shorter-maturity notes fall, those on longer-term bonds rise, or both. The gap typically narrows when investors anticipate slower economic activity and demand less compensation on expectations of limited inflation.

Trading in Treasurys was closed in Japan and stayed shut in the U.K. for Boxing Day, according to the Securities Industry and Financial Markets Association. It is taking place as usual in New York after being shut yesterday around the world for Christmas, according to the website.

Congress will return to session tomorrow with five days before the budget-agreement deadline under the terms of the August 2011 agreement that raised the U.S. debt ceiling. The Congressional Budget Office has said that the automatic tax boosts and spending reductions may cause a recession next year.

“People are certainly concerned about the fiscal cliff,” said Guy Haselmann, an interest-rate strategist in New York at Bank of Nova Scotia, one of the 21 primary dealers that trade with the Fed. “Even if there is a deal, what does a deal mean, and how watered down is it going to be? We’re going to make all the hard decisions next year, so uncertainty just hangs over the marketplace.”

Treasury returns

Treasurys have returned 2 percent this year on an annualized basis, set for the worst performance since a 3.7 percent loss in 2009, according to Bank of America Merrill Lynch Indexes. The Standard & Poor’s 500 Index of U.S. shares has returned 15 percent on a similar basis, including reinvested dividends, amid signs the U.S. economy is improving.

U.S. government securities have lost 0.3 percent this quarter and 0.7 percent this month, Merrill Lynch data show.

The Fed will begin buying $45 billion of Treasurys each month after another program called Operation Twist expires at year-end. The move will expand a round of quantitative easing under which the central bank purchases $40 billion a month in mortgage bonds to spur economic growth.

Property values

The S&P/Case-Shiller index of property values in 20 U.S. cities increased 4.3 percent from October 2011, the biggest 12- month advance since May 2010, the group said today in New York. The median forecast of 30 economists in a Bloomberg survey projected a 4 percent gain.

U.S. new-home sales climbed to a 380,000 annual rate in November, the most since April 2010, according to a Bloomberg News survey of economists before the Commerce Department reports the figure tomorrow.

The extra yield 10-year Treasurys offer over same-maturity German bunds approached the most in eight months on speculation the U.S. economy will grow faster than Europe’s in 2013. The difference between the two rates was 40 basis points. The spread widened to 41 basis points on Dec. 18, the most since April.

The U.S. economy will expand 2 percent in 2013, versus 0.8 percent for Germany, separate surveys showed.

Germany’s 10-year note yielded 1.38 percent as of the end of last week before trading stopped for the Christmas holidays.

German bonds advanced this year as Europe’s debt crisis drove demand for the relative safety of the nation’s securities. Treasurys lagged behind as the U.S. unemployment rate fell to 7.7 percent in November, the lowest level since 2008.

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