US bond prices rise as debt ceiling deal seen near

US Treasury debt prices rose in light trading on Friday as investors prepared for the weekend by covering short positions and buying long bonds amid lower growth forecasts and uncertainty over US and European politics. Treasuries ended a volatile week with price gains, a day after a warning by Standard & Poor's sent bond prices plummeting.
"Some people continue to lower their forecasts for growth and some are even talking about lowering their forecasts for nonfarm payrolls for next month, all on very low volume," said Justin Lederer, interest-rate strategist at Cantor-Fitzgerald in New York.
But there was renewed market optimism on Friday that US lawmakers would reach a deal to cut the deficit and thereby avoid a ratings downgrade and a possible default. Some investors, however, remain unconvinced a deal is near and continued to prepare for the possibility of a default if the US debt ceiling is not lifted by August 2, when the Treasury has warned it may run out of cash.
Bonds were boosted on Friday as President Barack Obama and House Speaker John Boehner worked toward a plan that could include up to $3 trillion in spending cuts, but might leave tax reform for later. "The idea is we may get a deal over the weekend," said Richard Gilhooly, interest rate strategist at TD Securities in New York.
Benchmark 10-year Treasury notes rose 14/32 in price to yield 2.96 percent, down from 3.01 percent late on Thursday, and five-year notes increased 6/32 in price to yield 1.51 percent, down from 1.55 percent. Thirty-year bonds were last up 28/32 in price to yield 4.26 percent, down from 4.31 percent. Spending cuts of $3 trillion may also be large enough to persuade Standard & Poor's to maintain its top ratings on the world's largest economy.
S&P on Thursday reiterated that there is a 50-50 chance it may downgrade the country over the near term if there is no plan to significantly reduce the deficit. But some investors remained sceptical and continued to prepare for the worst case scenario; a US default.
"We're trying to hedge out volatility, take risk off the table until we get more clarity about this," said Mitch Stapley, chief fixed-income officer at Fifth Third Asset Management in Grand Rapids, Michigan, which manages $18 billion in assets. Stapley said the firm has been selling Treasury bills that mature in August, when the Treasury has warned it may run out of cash. Instead the firm is holding cash in accounts that need to make payments in the month, just in case the Treasury skips a debt payment.
"There could be some sort of short-term disruption," he said, adding "we think it's a low probability." Treasuries were also boosted on Friday by fears a plan to stem contagion from Greece's debt woes may not go far enough to stabilise the region.
"There's definitely concerns about Europe down the road," said Alan De Rose, head trader of government trading and finance at Oppenheimer & Co in New York. "While this is more comprehensive than anything they've done to this point, it probably doesn't take all the risk and uncertainty off the table over a slightly longer time," he said. Euro zone leaders agreed on a second rescue package for Greece that risks triggering a temporary default and will give their financial rescue fund broader powers to try to prevent market instability spreading through the region. The plan fails to address debt problems of other countries in the region, Stapley said.
"The solution for Greece doesn't provide a mechanism to deal with Portugal, Italy, or Ireland," he said. "Next week you could wake up and see the bond vigilantes circling on someone else." The cost of insuring US debt in the credit default swap market also dropped to its lowest level in almost two weeks, falling 3 basis points to 52 basis points, or $52,000 per year to insure $10 million for five years, according to Markit.