Updated Friday, October 31, 2014 as of 3:11 AM ET

Treasuries Fall as Obama Confident U.S. Will Avoid Fiscal Cliff

Treasuries fell, following a four- week gain, after President Barack Obama said he was confident the U.S. will avoid the automatic spending cuts and tax increases scheduled to occur at year-end.

Ten-year yields climbed from near the lowest level in two months before an industry report that economists said will show sales of previously owned U.S. homes were within 2 percent of the most in two years in October. Treasuries also declined as European and Asian stocks rallied, damping demand for safer assets. Nomura Holdings Inc., one of the 21 primary dealers that underwrite the U.S. debt, said it was trimming its position as officials made progress on the so-called fiscal cliff.

“At the moment most people think some sort of compromise will be found” on the fiscal cliff, said Karsten Linowsky, a fixed-income strategist at Credit Suisse Group AG in Zurich. “We’ve had some strength in the data, so overall the picture is not too bad. After we’ve come down over the past few weeks in yields, it’s natural to see some rebound.”

The U.S. 10-year yield climbed three basis points, or 0.03 percentage point, to 1.61 percent at 7:18 a.m. in New York, according to Bloomberg Bond Trader prices. The 1.625 percent note maturing in November 2022 fell 1/4, or $2.50 per $1,000 face amount, to 100 5/32. The yield dropped to 1.55 percent on Nov. 16, the lowest since Sept. 5.

The 10-year rate may increase to between 1.70 percent and 1.80 percent by the end of December, Linowsky said. A Bloomberg survey of banks and securities companies with the most recent projections given the heaviest weightings projects it will be at 1.72 percent as of Dec. 31.

‘Dealt With’

“I am confident we can get our fiscal situation dealt with,” Obama said yesterday at a news conference in Bangkok, where he started a three-nation Asian trip.

Before he departed the U.S., the President began on a round of deficit-reduction talks with top Republicans and Democrats to avoid the combination of $607 billion in automatic tax increases and spending cuts that threatens to cause a recession.

“In light of recent developments out of D.C., and political leaders at least trying to move in the right direction and avert a hard fiscal cliff, we think it’s prudent to pare back on some of our tactical bullish expressions in our portfolio,” George Goncalves, head of interest-rate research at Nomura in New York, wrote to clients on Nov. 16.

Housing Data

Purchases of existing homes held at a 4.75 million annual rate last month, according to the median forecast in a Bloomberg News survey before the report from the National Association of Realtors at 10 a.m. New York time. Sales climbed at an annual rate of 4.83 million units in August, the most since May 2010.

Housing starts slowed in October to an 840,000 pace from a four-year high of 872,000 units in September, another survey showed before tomorrow’s Commerce-Department figures.

The Federal Reserve is swapping short-term Treasuries in its holdings with those due in six to 30 years to spur the economy by putting downward pressure on borrowing costs. The central bank plans to sell as much as $8 billion of securities due from July 2015 to November 2015 today, according to the Fed Bank of New York’s website.

Treasuries completed a four-week gain on Nov. 16, driven by demand for the relative safety of U.S. securities on speculation the fiscal cliff will choke of economic growth.

Investor appetite for the most secure assets also increased as Europe’s debt crisis remained unresolved and Israeli ground forces prepared to invade the Gaza Strip for the first time in almost four years.

The Stoxx Europe 600 Index of shares gained 1.3 percent today and the MSCI Asia Pacific Index rallied 1 percent.

International Demand

Investors outside the U.S. are scooping up Treasuries.

Brazil, Belgium, Luxembourg, Russia, Switzerland, Taiwan and Hong Kong boosted their holdings of U.S. government securities by a collective $264.8 billion since the last debt- ceiling debate ended in August 2011, Treasury data released Nov. 16 show. The purchases more than made up for the $123 billion decline in U.S. government debt owned by China, America’s biggest overseas creditor, to $1.156 trillion.

Treasuries have returned 0.9 percent in the month ended Nov. 16, according to Bank of America Merrill Lynch indexes. The MSCI All-Country World Index of stocks handed investors a 5.2 percent loss, according to data compiled by Bloomberg.

The 10-year term premium, a model created by Fed economists that includes expectations for interest rates, growth and inflation, declined to minus 0.95 percent on Nov. 16, the lowest since Oct. 3. A negative reading indicates investors are willing to accept yields below what’s considered fair value. It was at minus 0.92 percent today.

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