US Treasuries rose on Friday as investors worried that Congress and President Barack Obama could again find themselves at loggerheads over the budget as the deadline on the "fiscal cliff" of automatic spending cuts and tax rises draws closer.
Obama on Tuesday invited congressional leaders to the White House to start negotiating a deal to avert the $600 billion package of automatic tax hikes and spending cuts set to kick in at the start of the year. He vowed to veto any bill that would extend tax cuts for the top 2 percent of wage earners.
The invitation came just hours after John Boehner, the Republican speaker of the House of Representatives, said raising tax rates on the wealthy would slow US job creation. But he also talked about eliminating loopholes in the US tax code. "The market is trying to understand what the backdrop is going to look like in the weeks and months and quarters ahead," said Tom Porcelli, chief US economist at RBC Capital Markets in New York.
"Both sides have made it sound as if they're willing to work with one another. But again, the devil's in the details." US stocks also cut gains after Obama's remarks. Thirty-year bonds rose 17/32 to yield 2.751 percent, from 2.777 percent on Thursday. Those bonds notched their biggest weekly fall in yield since the final week of May.
US 10-year notes erased early losses after Obama spoke, trading up 02/32 to yield 1.613 percent, from 1.618 percent on Thursday. Traders also noted that current bond market yields are about where they were when a rally stalled in late August and early September. "It might be difficult to escape this range," said ING trader Jake Lowery, Treasury trader at ING Investment Management in Atlanta, with $170 billion in assets under management.
Markets are focused on what would happen to the economy if and when US federal spending cuts roll in and the Bush-era tax cuts roll off next year, which would be the case if no agreement is reached on a compromise to reduce the US federal budget deficit. The non-partisan Congressional Budget office has said such an abrupt fiscal tightening as would occur under automatic measures could put the economy back into recession and boost the unemployment rate to 9 percent.
Such a scenario would be supportive for bond prices. Concerns about the euro zone economy also constrained selling of US debt. Growth in Germany, Europe's largest economy, is likely to slow in the fourth quarter and the first three months of 2013. Industrial production in France, the euro zone's second-largest economy, shrank in October, and the country's central bank said it expected the country to slip into recession at the end of 2012.
Adding to the wary mood, markets are awaiting a vote on Sunday by the Greek government on its 2013 budget, approval of which is needed to win access to international aid. There was also uncertainty over whether Spain would apply for financial aid. Spain has so far resisted asking for aid.
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