A lack of progress of talks in Washington to avert a fiscal crisis lifted U.S. Treasury prices for a third straight day on Wednesday as the government sold $35 billion of five-year Treasury notes.
Bond prices pulled back from earlier highs after U.S. House of Representatives Speaker John Boehner said he was "optimistic" on reaching a budget deal before the end of the year to avoid a crisis. President Barack Obama later said he hopes he and Congress can reach an agreement to avoid the "fiscal cliff" and shrink the budget deficit before Christmas.
But the market stayed in positive territory given the absence of specifics on how the two major political parties plan to arrive at a compromise on possible tax increases and spending cuts.
Investors are worried gridlock between the White House and Congress over the series of automatic tax increases and spending cuts worth $600 billion that could phase in next year may well push the United States back into recession. Those worries have underpinned safe-haven support for the bond market since the U.S. presidential election three weeks ago.
Investors dialed back hopes for a timely budget deal after Senate Majority Leader Harry Reid, a Democrat from Nevada, said on Tuesday he was disappointed there has been "little progress" in the negotiations.
"Since (Reid's) comments ... bonds have been popping up," said Thomas Roth, executive director of U.S. government bond trading at Mitsubishi UFJ Securities USA in New York.
The remarks from Boehner, the top Republican lawmaker, were similar in tone to what he has said previously. The bond market remained skeptical whether a fiscal deal will be attained before year-end.
"There is some more optimism from (Boehner's) comments, but they still have not agreed on the details on how they will raise more revenues and how they will cut more spending, so there's a lot of work to be done," said Sean Incremona, senior economic analyst at 4Cast Ltd in New York.
Benchmark 10-year Treasury notes last traded 7/32 higher in price with a yield of 1.617 percent, down over 2 basis points from late Tuesday and under the 100-day moving average of 1.6495 percent, according to Reuters data.
The 30-year bond was 9/32 higher in price, yielding 2.774 percent, down 2 basis points from Tuesday's close and below the 100-day moving average of 2.7875 percent.
U.S. stocks reversed earlier losses after Boehner's remarks. They had hit session lows earlier after the government said new single-family home sales fell slightly in October and revised sharply lower its estimate for September sales, denting optimism over the housing market recovery, one of the brighter sectors of the economy.
On the supply front, the Treasury Department continued its month-end sales of new short-to-medium-term debt, totaling $99 billion.
It auctioned $35 billion in five-year notes at a high yield of 0.641 percent. The sale followed record demand for $35 billion of two-year notes on Tuesday. It will sell $29 billion of seven-year debt on Thursday.
Meanwhile, the Federal Reserve was conducting two separate purchases of Treasurys as a part of its "Operation Twist" stimulus program, which is aimed at lowering long-term interest rates to help the economy.
The Fed bought $1.85 billion of Treasurys that mature in February 2036 to November 2042 in the first operation on Wednesday morning and was in the process of buying $4.25 billion to $5.25 billion of Treasurys maturing November 2018 through November 2020 on Wednesday afternoon.