U.S government bonds gained in price on Wednesday as investors saw a diminishing likelihood that U.S. lawmakers will stave off a fiscal crunch of spending cuts and tax hikes scheduled for the new year, which are seen likely to hurt the economy.
Republican leaders in the U.S. House of Representatives said on Wednesday that talks with President Barack Obama to resolve the fiscal cliff were deadlocked, and they demanded a meeting with the president to move the negotiations forward.
Bonds accelerated price gains and benchmark 10-year note yields fell to their lowest levels in two weeks as stocks declined, adding to the bid for safe-haven debt.
"It seems to me that without some deal the market is going to stay bid and there's going to be a reach for yield. I think the probability of going off the fiscal cliff gets higher by the day," said Charles Comiskey, head of Treasury trading at the Bank of Nova Scotia in New York.
Bonds also gained as the Federal Reserve completed its latest bond purchases as part of its "Operation Twist" program. The Fed bought $4.75 billion in notes due 2021 and 2022 on Wednesday as part of Operation Twist, which designed to lower long-term borrowing rates.
Demand for U.S. government debt was boosted earlier after Spain failed to meet the maximum target at a debt auction, raising worries that demand for the euro zone sovereign's bonds was drying up.
Many economists expect Spain to eventually seek a bailout from its euro zone partners to cover for a jump in financing needs next year.