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Treasuries Climb Amid Worries About The Sequester

With traders expressing concerns about the impact of automatic government spending cuts, treasuries moved moderately higher during trading on Friday.

Bond prices moved to the upside in early trading and remained firmly positive throughout the remainder of the session. Subsequently, the yield on the benchmark ten-year note, which moves opposite of its price, fell by 3.5 basis points to 1.853 percent.

The drop on the day extended a recent downward move by the ten-year yield, which ended the session at its lowest closing level in over a month.

Treasuries benefited from worries that the automatic spending cuts taking effect today will lead to a slowdown by the U.S. economy.

Approximately $85 billion in automatic cuts to both defense and domestic spending are due to go into effect before midnight due to Washington lawmakers' inability to reach a budget compromise.

The automatic spending cuts, known as the sequester, were implemented as part of the Budget Control Act of 2011 in order to push lawmakers to compromise on a broader budget agreement.

Members of both political parties warned about the economic impact of the cuts, but familiar disagreements over taxes and entitlement reforms prevented lawmakers from reaching an agreement to avoid them.

Buying interest was also generated by the release of a report from the Commerce Department showing a sharper than expected pullback in personal income in the month of January.

The report said personal income tumbled by 3.6 percent in January after surging up by 2.6 percent in December. Economists had been expecting income to pull back by about 2.1 percent.

At the same time, the Commerce Department said personal spending edged up by 0.2 percent in January after inching up by 0.1 percent in December. The increase in spending matched economists' expectations.

An upbeat report on manufacturing activity also helped to limit the upside for treasuries, with the Institute for Supply Management's manufacturing index reaching its highest level in over a year and a half.

The Institute for Supply Management said its index of activity in the manufacturing sector rose to 54.2 in February from 53.1 in January, with a reading above 50 indicating growth in the sector. With the increase, the index reached its highest level since June of 2011.

Next week, the Labor Department's monthly employment report is likely to be in focus, although the data may be seen as old news considering it reflects a time before the sequester takes effect.

Ahead of the release of the jobs report next Friday, reports on service sector activity, factory orders and international trade are likely to attract attention along with the Federal Reserve's Beige Book.

by RTTNews Staff Writer

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