The ongoing budget stand-off in Washington has underpinned safe-haven demand for bonds since the US presidential election a month ago. The possibility that the White House and Congress will fail to reach a deal to reduce the federal deficit by year-end is heightening concern about a $600 billion fiscal contraction, dubbed the "fiscal cliff," and a US recession next year.
"There's no resolution with the fiscal cliff and you have the Fed buybacks. They are driving the market again today," said Andrew Richman, fixed income strategist at SunTrust Private Wealth Management in Palm Beach, Florida. Benchmark 10-year Treasuries were last up 1/32 in price to yield 1.586 percent, 0.5 basis point lower than late on Wednesday. The 10-year yield touched 1.564 percent earlier, a level not seen in nearly three weeks.
Thirty-year bonds last traded 7/32 higher to yield 2.769 percent, down from 2.780 percent late Wednesday. Among shorter maturities, two-year notes last yielded 0.242 percent after hitting 0.234 percent earlier, the lowest level since October 4, according to Reuters data.
The US central bank bought a combined $6.1 billion in longer-dated Treasuries in two separate moves for its "Operation Twist" on Thursday. This bond program, which is set to expire at year-end, is intended to lower mortgage rates and other long-term borrowing costs. It involves the Fed selling its short-dated Treasuries and buying longer-dated issues on the open market.
The Fed is widely expected to launch another bond purchase program next year to complement its third round of quantitative easing, nicknamed QE3. Fed policymakers will likely decide on such a move at their two-day meeting set to begin next Tuesday. "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.
Treasuries prices stretched higher on pessimism that there would be a breakthroughs between US President Barack Obama and top Republican lawmakers on attaining a compromise on a long-term solution to pare the country's $16 trillion in debt. The absence of a budget deal before year-end would trigger a series of spending cuts and tax hikes to be phased in next year, threatening the economic recovery.
With jobs growth remaining a top priority in Washington and at the Fed, a dismal payroll report on Friday will surely fuel anxiety about the fallout from the "fiscal cliff". US employers likely added 93,000 jobs in November, early half of the gain produced in October, according to economists recently polled by Reuters. The jobless rate likely held at 7.9 percent last month, a level that will support the Fed clinging to its ultra-loose monetary policy. The US Labour Department will release its November payroll figures at 8:30 am EST (1330 GMT) on Friday.