Wed Nov 7, 2012 5:34am EST
* Debt prices buoyed by monetary and fiscal policy outlook
* Obama election win widely anticipated by financial markets
* Fed accommodation and looming fiscal cliff support T-notes
By William James
LONDON, Nov 7 (Reuters) - U.S. Treasuries rallied on Wednesday following the re-election of President Barack Obama as expectations of loose monetary policy and political gridlock over spending cuts combined to support safe-haven bonds.
Obama won a second term in the White House after scoring impressive victories across the country, although control of the U.S. congress remained split with Democrats controlling the Senate and Republicans keeping the House of Representatives.
Treasuries began rallying as media projections on results from key states trickled in and after a brief dip at the European open, futures remained well supported at 133-05/32, up 29/64.
Although 10-year T-note yields fell 6.3 basis points to 1.686 percent, traders said the result was in line with financial market expectations and would not trigger a major change in price trends.
"An Obama win was around 85 percent priced in, and it all went according to plan and that's why we're pretty much where we were this time yesterday," said Craig Collins, a Treasuries trader at Bank of Montreal in London.
The election outcome is seen by financial markets as broadly positive for Treasuries for two reasons.
Firstly, under Obama the U.S. Federal Reserve's monetary policy is likely to remain accommodative - meaning the central bank will keep supporting bond prices by buying debt in a bid to lower borrowing rates and stimulate the economy.
Secondly, with the U.S. congress split, investors are anticipating difficulty in negotiating a way around $600 billion in government spending cuts and higher taxes due to be enacted next year. This so-called 'fiscal cliff' is seen as a threat to economic growth.
"Clearly Mr Obama is going to stick to his guns in terms of the loose monetary stance ... plus there's still uncertainty over the outlook for resolving the fiscal logjam. Consequently, Treasury yields are moving lower," said Nick Stamenkovic, strategist at RIA Capital Markets in Edinburgh.
STATUS QUO
Traders said that the rally was unlikely to push 10-year bond yields much further below the 1.60 percent mark which has held since early September, with a rush of sidelined funds potentially looking to get back into riskier equities and tempering the appeal of low-yielding bonds.
Over the medium term, the looming fiscal cliff was going to be the main focus for investors, traders said, with the threat of a fresh recession keeping safe-haven assets supported while a solution appeared a distant prospect.
"The dollar is still the most liquid currency in the world and is the biggest constituent of global FX reserves. So, even if we do go over the proverbial fiscal cliff, I think the downside for Treasuries is still not that much," Stamenkovic said.
Recent history supports the view that Treasuries remain a safe haven even when extreme circumstances threaten the U.S. economy.
In 2011, U.S. debt prices remained solid throughout bickering over raising the national debt limit that took the country to within a whisker of default and contributed to the loss of its AAA rating by Standard and Poor's.
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