NEW YORK: US benchmark Treasury yields dipped to near their lowest in three weeks on Thursday, supported by expectations the Federal Reserve will announce a new bond purchase program when it meets next week.
The Fed is making two bond purchases on Thursday as part of its Operation Twist program, which involves buying long-term debt and funding the purchases with sales of short-dated notes.
The program is scheduled to expire at the end of the year, when traders expect the Fed will instead make outright purchases of longer-dated Treasuries as it runs out of short-dated debt to sell.
"People may be starting to trade on expectations that once Operation Twist ends, the next QE will be buying intermediate and longer-dated securities without selling the front-end," said James Newman, head of Treasuries and Agency trading at Keefe, Bruyette and Woods in New York.
The Fed bought $1.98 billion in debt due between 2036 and 2042 on Thursday. It will buy between $4.25 billion to $5.25 billion in notes due from 2018 to 2020 in a second buy-back later in the day.
Treasuries gained even as more positive signs emerged in Washington that lawmakers will reach a deal to stave off a fiscal crunch at year-end, when a combination of spending cuts and tax increases threatens to harm the economic recovery.
While Republican leaders in the House of Representatives insist that raising tax rates on the rich is an impossibility, some Republican lawmakers now see it as inevitable to avoid the "fiscal cliff" of severe tax hikes and spending cuts set to start in January.
Further progress in reaching a deal may hurt Treasuries, as less uncertainty would make the safe-haven assets less attractive.
"We're getting a very positive vibe out of Washington with some Republicans crossing over to support Obama's budget plan, which leads us to believe that the long-end of the curve should be selling off and we should be steepening," said Newman.
US government bonds also gained in line with safe-haven German government debt after European Central Bank President Mario Draghi said growth in the euro zone is likely to shrink next year, boosting expectations of a rate cut.
"There was some negative news out of Europe in terms of economic growth. Bunds are trading really well so to some extent we are probably following them," said Alan De Rose, head trader of government trading and finance at Oppenheimer & Co in New York.
Benchmark 10-year Treasuries were last up 7/32 in price to yield 1.57 percent, down from 1.59 percent late on Wednesday.
Thirty-year bonds gained 20/32 in price to yield 2.75 percent, down from 2.78 percent.
Bonds showed little reaction to data showing the number of Americans filing new claims for unemployment benefits fell for a third straight week last week.
Investors are also focused on the release on Friday of the government's monthly payrolls report for November, which is expected to show that employers added 93,000 jobs in the month, according to the median estimate of economists polled by Reuters.
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