Dollar
US benchmark Treasury debt prices rose for a third consecutive session on Friday on safe-haven buying as hopes faded for a deal to avoid tax hikes and spending cuts that could throw the US economy back into recession.
Investors are focused on Washington as President Barack Obama and lawmakers launch a last-chance round of budget negotiations days before a New Year’s deadline to reach a deal. Expectations remained low a deal would be reached by the deadline. Window-dressing for year-end and month-end extension buying also boosted demand for Treasuries on the next-to-last trading day of 2012.
Benchmark 10-year notes traded 12/32 higher in price, with yields falling to 1.69%, marking the lowest in two weeks and down from 1.73% late Thursday. Benchmark notes posted their biggest daily dip in yield in over seven weeks and were down about eight basis points on the week.
Concerns that lawmakers will fail to reach a deal to resolve the fiscal crunch by year-end are expected to keep a bid for Treasuries in the coming days, or weeks.
Many investors expect that negotiations will extend beyond Monday’s deadline, with some kind of agreement likely in the first few weeks of January.
Some fear that lawmakers are unlikely to reach a substantive consensus on how to reduce the US deficit, with the most likely outcome that they will agree on smaller issues in early January and then push back negotiations on larger issues to later in 2013. Such a delay could also increase the risk of further negative actions on the US credit rating.
Euro
German Bunds rose on Friday as investors sought safe-haven assets before a last-chance round of talks in the US aimed at averting a fiscal crisis next year.
In Italy, government bonds erased minor early losses after a sale of nearly €6bn of five- and 10-year debt went smoothly.
Bund futures were last 20 ticks higher on the day at 145.74, while German 10-year cash yields dropped 1.7 basis points to 1.30%.
The market was still pricing in the likelihood of a US deal in early January that would imply a fiscal tightening in the magnitude of 1 to 1.5% of gross domestic product, Commerzbank rate strategist Rainer Guntermann said. In this case, 10-year German yields could rise to 1.40%, he said. In the absence of a deal, Guntermann said 10-year yields would probably fall below 1.25%.
In Italy, even though borrowing costs at a debt auction rose slightly compared with a previous auction, they were below those in the secondary market, a sign of healthy demand, despite growing nervousness about the impact for policy of an election due in February.
Ten-year Italian government bonds turned higher after the auction, having been under pressure in early trading. Yields were 1 basis point lower at 4.52%, having stood at 4.55 before the results.
Range for previous week: $1.3164–$1.3284
Range for this week: $1.3100–$3350
Sterling
Gilts were little changed on Friday, with investors wary ahead of a key meeting between President Obama and congressional leaders bidding for a last-minute fiscal deal.
The March gilt future settled 4 ticks lower at 118.97, while the equivalent Bund was 10 ticks higher. The British contract traded in a narrow range for most of the session in thin seasonal volumes. Gilt futures came under pressure late in the session, in line with Bunds and Treasuries, after Obama was reported as saying that he will offer a new budget plan.
Ten-year gilt yields were steady at 1.81%, with their spread over equivalent Bunds 2 basis points wider at 50 basis points. Next week, December PMI surveys on British manufacturing, construction and services will provide clues about the health of the economy at the end of 2012.
“Given that there was a small downward revision to Q3 GDP data, it is possible that if the PMI data were to disappoint ... I think that could excite the market,” said RBC Capital Markets strategist Sam Hill. He added that the services PMI would garner the most attention, noting that the index had not fallen below the 50 mark that separates growth from contraction since December 2010. On Thursday, Britain’s Debt Management Office will auction €3.75bn ($6.05bn) of 1% 2017 gilts.
Range for previous week: $1.6064–$1.6206
Range for this week: $1.6000–$1.6270
Yen
Japanese government bonds were steady on the last trading day of 2012 with benchmark yields at the three-month high hit in the previous session, on expectations that the New Year will bring more fiscal and monetary stimulus measures. Markets here will be closed for the long New Year’s holiday in Japan, and will reopen on January 4.
The 10-year JGB yield was flat at 0.800%, its highest level since September 21. Earlier Friday, it slipped to 0.795%. Benchmark yields dropped as low as 0.685% on December 6, their lowest since June 2003. They finished 2011 at 0.980%.
The benchmark 10-year JGB futures contract ended up 0.15 point at 143.65 on Friday, though still well shy of December 7’s intraday high of 145.26, which was the highest level ever for a 10-year JGB futures contract. Futures finished 2011 at 142.41.
Yields on 20-year bonds edged down half a basis point to 1.755%, after earlier rising as high as 0.1770%, their highest since early April. Yields on 30-year bonds also shed half a basis point to 1.975%.
The market shrugged off downbeat economic data released on Friday morning, even though it bolstered the case that more monetary stimulus steps probably lay ahead from the Bank of Japan.
Industrial output fell 1.7% in November, more than triple the median market forecast for a 0.5% decline. The Bank of Japan delivered further easing steps last week in response to intensifying pressure from new Prime Minister Shinzo Abe, whose government was sworn in two days ago.
In addition to monetary stimulus, the government will compile spending requests for its own stimulus package on January 7 and finalise the proposal shortly thereafter, to implement Abe’s agenda of “big” spending to help narrow the output gap and ease deflation.
Range for previous week: ¥84.20–¥86.63
Range for this week: ¥83.60–¥ 87.20