U.S. Treasurys gained a safety bid on Friday after House of Representatives Speak John Boehner failed to gain support for a tax plan, hurting stocks on concerns that lawmakers will be unable to reach a deal to avert the "fiscal cliff.''
The failure cast fresh uncertainty over talks to avoid roughly $600 billion in across-the-board tax hikes and automatic government spending cuts due to begin in January that could push the U.S. economy back into recession in 2013.
The negotiations are expected to continue to dominate markets in the coming weeks, while trading volumes are expected to fall with the market closed next Tuesday for the Christmas holiday and as investors close books for year-end.
"It's going to be all about whether things are being negotiated or not, what are the probabilities of us going over the cliff, are they getting worse or are they getting better,'' said Rick Klingman, a Treasurys trader at BNP Paribas in New York.
Treasurys yields have fallen from two-month highs on Tuesday as doubts that lawmakers will reach a compromise increased.
"Overall the 'risk on' mood from the last couple of weeks, with the thought process that something will get done in Washington, is being unwound a little bit,'' Klingman said.
That trend may continue until there are fresh signs that a deal is more likely.