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Treasuries Close Firmly Negative Amid Optimism About Fiscal Cliff

Treasuries saw considerable weakness during trading on Tuesday, extending the downward move seen in recent sessions amid optimism about avoiding the looming fiscal cliff.

Bond prices moved steadily lower over the course of the session, ending the day firmly in negative territory. Subsequently, the yield on the benchmark ten-year note, which moves opposite of its price, rose by 6.4 basis points to 1.827 percent.

The gain on the day extended a recent upward move by the ten-year yield, which ended the session at its highest closing level in almost two months.

Optimism about potentially avoiding the looming fiscal cliff contributed to the weakness among treasuries amid signs of progress in negotiations between President Barack Obama and House Speaker John Boehner, R-Ohio.

The latest proposal from the White House reportedly increased the amount of income that would be subject to higher tax rates to $400,000 and cut government spending by $1.2 trillion, including interest savings.

While Boehner argued that Obama's latest proposal is still not balanced, the offer suggests that the two sides are moving closer to a compromise.

Boehner indicated in remarks at a press conference with other Republican leaders that he also has a "Plan B" that would extend the current tax rates on Americans who make $1 million or less.

However, both the White House and Senator Majority Leader Harry Reid, D-Nev., argued that the GOP's "Plan B" could not pass the Senate.

On the economic front, the National Association of Home Builders released a report showing that U.S. homebuilder confidence improved for the eighth consecutive month in December.

The report showed that the NAHB/Wells Fargo Housing Market Index climbed to 47 in December from a revised 45 in November. Economists had expected the index to edge up to 47 from the 46 originally reported for the previous month.

With the increase, the housing market index rose to its highest level since reaching a reading of 51 in April of 2006.

Treasuries saw continued weakness following the release of the results of the Treasury Department's auction of $35 billion worth of five-year notes, which attracted below average demand.

The five-year note auction drew a high yield of 0.769 percent and a bid-to-cover ratio of 2.72, while the ten previous five-year note auctions had an average bid-to-cover ratio of 2.87.

The bid-to-cover ratio is a measure of demand that indicates the amount of bids for each dollar worth of securities being sold.

Trading on Wednesday could be impacted by the release of the Commerce Department's report on housing starts in the month of November, although traders are likely to keep a close eye on the developments in Washington.

by RTTNews Staff Writer

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