Treasuries climbed, with 10-year yields falling the most in six weeks, after House Speaker John Boehner scrapped a plan to allow higher tax rates on income above $1 million, throwing budget talks deeper into turmoil.
Bonds remained higher, gaining for a third day, after even data showed U.S. consumer spending increased and durable-goods orders rose. Boehner's decision means lawmakers won't vote until after Christmas on ending a budget showdown that may push the world's biggest economy into recession. If they fail to reach an agreement by year-end, more than $600 billion of automatic tax increases and spending cuts will start taking effect.
"The Treasury market is bid despite a strong round of economic data," said Ian Lyngen, a government bond strategist at CRT Capital Group LLC in Stamford, Connecticut. "It was well bid overnight on concerns the fiscal cliff is rapidly approaching and negotiations appear to have broken down."
The U.S. 10-year yield dropped six basis points, or 0.06 percentage point, to 1.74 percent at 10:12 a.m. New York time. It slid the most since Nov. 7. The price of the 1.625 percent note due in November 2022 gained 1/2, or $5 per $1,000 face amount, to 98 30/32, according to Bloomberg Bond Trader prices.
The gain pared the benchmark note's third weekly loss. The yield has increased four basis points since Dec. 14, and it touched 1.85 percent on Dec. 18, the highest since Oct. 25.
Thirty-year bond yields slid six basis points to 2.92 percent, the lowest since Dec. 17.
Treasuries have returned 1.8 percent this year, set for the worst annual performance since a 3.7 percent decline in 2009, according to indexes compiled by Bank of America Merrill Lynch. U.S. government securities have lost investors 0.4 percent this quarter and 0.8 percent in December.
Volatility in Treasuries fell yesterday for a second day. Bank of America Merrill Lynch's MOVE index, which measures price swings of U.S. government securities based on options, declined to 54.4 basis points from 57.8 on Dec. 19. It rose to 63 basis points on Dec. 18, the highest level since Nov. 6.
A vote on Boehner's plan to allow higher tax rates was canceled because of resistance from within his own Republican party, the House speaker said in a statement yesterday. Until Dec. 17, President Barack Obama and Boehner had been edging closer to a deal that would have included $1 trillion each in tax increases and spending cuts.
The Congressional Budget Office has said the spending reductions and tax increases set to begin next month would probably lead to a recession in the first half of 2013 if they're not averted.
"They have essentially put the 'if' back into fiscal cliff, but the Treasury market reaction has been relatively moderate, which is symptomatic of the fact it's not over yet," said Richard McGuire, a senior rates strategist at Rabobank International in London. If a deal is reached "we should get a risk-on move which would push Treasury yields higher."
Treasuries stayed higher even after reports suggested the U.S. economy is gathering momentum, which usually fuels appetite for riskier assets.
Purchases by U.S. consumer increased 0.4 percent last month after a 0.1 percent drop in October that was smaller than previously estimated, Commerce Department figures showed today in Washington. The gain matched the median forecast of 80 economists surveyed by Bloomberg. Incomes rebounded after being depressed in October by lost wages due to Sandy. Durable-goods orders increased 0.7 percent in November, more than forecast, the Commerce Department said in another report.
The Federal Reserve will buy as much as $2.25 billion of Treasuries today maturing between February 2036 and November 2042, according to the New York Fed's website. The purchases are part of a program known as Operation Twist, under which the central bank is replacing its holdings of shorter-dated securities with longer-maturity debt.
The central bank will begin buying $45 billion of Treasuries a month next year in an expanded round of quantitative easing. The new purchases don't involve selling shorter-term securities.
The Treasury sold $14 billion of inflation-linked notes yesterday at a record-low yield of negative 1.496, the final of four auctions this week totaling $114 billion in nominal and inflation-indexed notes. It sold $66 billion in notes and bonds last week.
This week's offerings closed the books on $2.153 trillion of government debt sales in 2012, setting a record for demand at the Treasury's auctions for a third consecutive year.