Bond Prices Edge Higher on US Budget Worries

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U.S. Treasury debt prices edged higher on Monday as investors worried about budget battles in Washington, but a push for price concessions ahead of $66 billion in government debt sales this week kept gains modest.

Political rumblings in Italy and expectations for further monetary policy easing by the Federal Reserve when it meets this week also helped boost Treasury prices. U.S. lawmakers have yet to report substantial progress in talks meant to avert a package of automatic tax hikes and budget cuts set to kick in automatically at the start of the year.

With time running out for Congress and President Barack Obama to reach an agreement, the pace of talks has begun to pick up although neither side gave ground in public. Economists fear the looming "fiscal cliff'' of $600 billion worth of tax increases and spending cuts could send the U.S. economy back into recession if it is not averted.

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Nor was the news abroad any more calming.

In Italy, Prime Minister Mario Monti on Saturday said he would resign once the budget for 2013 was approved. Monti was trusted by investors to bring down Italy's huge debt and is credited with stabilizing the country's bond markets. But former Prime Minister Silvio Berlusconi's center-right party withdrew support for Monti last week, and Berlusconi said he could run to become premier for a fifth time.

His comment raised fears that Monti's successor may not continue his economic reforms and Italy could again come to the forefront of the euro zone debt crisis.

Treasurys were supported by "the prospect of more Fed buying and global uncertainties and very weak growth/recession forecasts into 2013, not to mention the fiscal cliff,'' said Richard Gilhooly, interest rate strategist at TD Securities in New York.

Benchmark 10-year Treasury notes were trading 3/32 higher in price to yield 1.615 percent, from 1.62 percent late Friday, while 30-year bonds were 8/32 higher to yield 2.796 percent, compared with Friday's 2.81 percent.

The Treasury will sell $32 billion of three-year notes on Tuesday, $21 billion of 10-year notes on Wednesday and $13 billion of 30-year bonds on Thursday. Investors often move to undercut prices heading into such auctions.

"With the lack of data today, the market will focus on the equity market direction, news of the fiscal cliff, and the set-up for this week's supply of three-year, 10-year and 30-year paper,'' said Tom di Galoma, managing director at Navigate Advisors LLC in Stamford, Connecticut.

A better-than-expected November U.S. jobs report on Friday did little to alter expectations that the Federal Reserve is likely to muster some additional bond-buying plans at its two-day meeting that begins on Tuesday.

Many investors expect the Fed at the close of the meeting to announce it will buy $45 billion per month of longer-dated Treasurys beginning in January to replace the current Operation Twist stimulus program that expires at the end of December. Under Operation Twist, the central bank is selling shorter-dated U.S. government debt and buying longer-dated Treasurys to extend the duration of its balance sheet. Analysts say the Fed has few shorter-dated Treasurys left to sell but is very likely to continue buying longer-dated debt next year, which would expand the central bank's balance sheet.