TREASURIES-Bond prices gain as fears of 'fiscal cliff' intensify
* Senate leader Reid hints U.S. might go over 'fiscal cliff'
* U.S. fast approaching debt ceiling, Geithner says
* Trading volume picks up but still light after Christmas
* Fed buys $4.61 bln in Treasuries due 2018-2020 for "Twist"
* January T-bill interest rates turn negative
NEW YORK, Dec 27 (Reuters) - U.S. Treasury debt prices rose on Thursday on safe-haven buying after the U.S. Senate majority leader hinted a federal budget deal was unlikely before a year-end deadline, raising chances of a burdensome package of tax hikes and spending cuts next year. The $600 billion in automatic fiscal maneuvers, referred to as the "fiscal cliff," is set to phase in after Monday, raising fears that the measures will crimp the economy and spur another U.S. recession. "It looks like that is where we're headed," Harry Reid, the Democratic leader of the Senate, said of the likelihood of going over the fiscal cliff. "That seemed to be the catalyst for the rise in bond prices," said David Keeble, global head of interest rates strategy at Credit Agricole Corporate & Investment Bank in New York. "It doesn't take much to spark this thinly traded market." Investors sold stocks and other risky assets and piled into Treasuries, sending the interest rates on T-bills for delivery in early January into negative territory. Some traders earlier had bet that a minor, temporary fix might still be approved by next Monday as President Barack Obama and Congress returned from their Christmas vacation. Most analysts said chances have faded of a timely budget compromise, and the bond market is poised for further gains after Reid's pessimistic remarks. "That's probable if it looks like we're going over and there's still no agreement in sight," said Richard Gilhooly, interest rates strategist at TD Securities in New York. Despite Thursday's moves, longer-dated debt prices and the shape of the yield curve suggested market expectations about the fiscal cliff have not shifted that much this week. Benchmark 10-year notes were 9/32 higher in price to yield 1.72 percent, down from 1.75 percent late Wednesday. The 10-year yield has fallen more than 12 basis points since touching an eight-week high last week. Thirty-year bonds rose 24/32 to yield 2.89 percent, down from 2.92 percent late Wednesday. Among T-bills, interest rates on issues due in the first half of January were quoted at minus 0.25 to 0.50 basis points. Trading volume rose from earlier in the week as most European markets reopened after the Christmas holiday, but it remained well below average. The anxiety that the United States could fall back into recession overshadowed a fall in new claims for jobless benefits to a near 4-1/2-year low and a rise in new home sales in November to their highest level since April 2010. Consumer confidence, however, hit a four-month low. Also on Thursday, the Federal Reserve bought $4.614 billion in notes due 2018-2020, as a part of its Operation Twist, which involves buying long-term debt and funding the purchases with sales of short-term notes. The Fed will replace Operation Twist with outright bond purchases ranging from five years to 30 years next year.
DEBT CEILING Monday will also mark the day the federal government is set to reach its $16.4 trillion debt limit if Congress does not take action, the Treasury Department said late on Wednesday. The government is facing a crunch on the debt ceiling because the issue has become snarled in the talks to avoid the fiscal cliff. To cut government spending and delay bumping up against the debt ceiling, the Treasury will suspend issuance of state and local government series securities -- known as slugs -- beginning on Friday, Treasury Secretary Tim Geithner wrote in a letter to Congressional leaders. The Treasury will take other measures to buy time for the government to approve a debt ceiling increase. This scenario echoed what happened in August 2011 when there was a stalemate between the White House and Congress on raising the federal debt limit and fears grew about a U.S. default. While Standard & Poor's stripped the U.S. of its top-notch credit rating, Treasuries prices quickly recovered from losses after the debt ceiling was raised.