US 10 year yields hold near 3 week lows on Fed hopes

LONDON: US benchmark Treasury yields held near three-week lows on Thursday with no sign of an imminent breakthrough in budget talks to avert a sharp fiscal tightening that could undermine the economic recovery.

Although many investors expect political leaders in Washington to eventually reach a deal to avert a fiscal contraction early next year as spending cuts kick in and tax cuts expire, there was no sign of progress in talks on Wednesday.

The 10-year T-notes last yielded 1.586 percent , 0.5 basis points below late US levels and near Wednesday's low of 1.576 percent, which was its lowest level in nearly three weeks.

"The risk is we continue to push down below the 1.50 percent level. The Treasury market is well bid and guys will be looking to stay long with this talk of a fiscal cliff," a trader said.

The White House and Republicans in Congress spent much of the day talking up their positions, fuelling investor fears that brinkmanship could delay a deal.

"Most people think there will be a deal at some point. Still I guess politicians cannot compromise easily, which means there's risk they will go off the cliff," a trader at a Japanese bank said.

The two-year yield stood slightly lower on the day at 0.238 percent, and could fall to its lowest level since early October, as market players expect the Federal Reserve to halt its selling of short-term notes when Operation Twist expires this month.

Economists expect the Fed to replace Operation Twist, in which it buys long-dated bonds and sells the same amount of shorter-dated ones, with a fresh bond-buying programme which would also support demand for Treasuries.

Investors were also looking to the monthly non-farm payrolls report on Friday though traders said market reaction might be limited by questions about its accuracy as it was likely to be distorted by the effects of superstorm Sandy on the US East Coast.

The report is expected to show employers added 93,000 jobs in November, according to the media estimate of economists polled by Reuters, compared with 171,000 in October.