Over the weekend, Boehner proposed an increase in taxes that, while still far short of what Obama is seeking, represented the first real movement in negotiations ahead of a December 31 deadline. "The market is in general anticipating some sort of deal out of Washington before the holiday week," said Greg Faranello, a Treasuries trader at Societe Generale in New York.
"If they get a deal done I would expect to see some more yield curve steepening as we head into 2013," he said. Benchmark 10-year notes fell 13/32 in price to yield 1.75 percent, just under their 200-day moving average and up from 1.70 percent late on Friday. Thirty-year bonds fell 1-1/32 in price to yield 2.92 percent, up from 2.87 percent.
Preparation for new Treasury supply this week also weighed on prices. The Treasury sold $35 billion in two-year notes to lukewarm demand, with the notes selling at a high yield of 0.245 percent, around 1 basis point higher than where the debt was trading before the auction.
Indirect bidders, that often include foreign buyers, took the smallest portion of the sale since February 2008 at 17.7 percent, and dealers took 53.9 percent, the most since September. The government will sell an additional $35 billion in five-year notes on Tuesday, $29 billion in seven-year notes on Wednesday and $14 billion in five-year Treasury Inflation-Protected Securities (TIPS) on Thursday.
Interest rates on some US one-month Treasury bills turned negative on Monday on strong demand fed by expectations that the Transaction Account Guarantee (TAG) program that protects large bank accounts will not be renewed by the end of the year. Analysts expect that the expiration of the program may result in hundreds of billions in assets being transferred to money market funds, which are then likely to increase their investment in short-term government bills.
Inflation expectations as measured by five-year Treasury Inflation-Protected Securities (TIPS) fell, though stayed near their recent highs as investors expect the Federal Reserve will tolerate higher inflation, after it said it will make new Treasuries purchases in a bid to stimulate the economy.
Five-year TIPS breakevens traded on Monday at 2.20 percent, down from a two-month high of 2.22 percent last week after the Fed's statement, but above the 2.18 percent area the debt had traded at before the statement. The Fed bought $4.90 billion in Treasuries due 2019 and 2020 on Monday as part of Operation Twist, which involves buying long-dated debt and funding the purchases with sales of short-dated notes. It will buy up to $2.25 billion each day this week in long-dated debt as part of this program.