By Isobel Kennedy

NEW YORK, DEC 4 (MNI) – Both sides in the fiscal cliff debate have made
their initial offers, and now it is time to get down to fine tuning the terms.

Whether that is possible or not is what is keeping the Treasury market on
pins and needles. It cannot move higher because a deal might get done. It cannot
move lower because a deal might not get done.

The 10-year note hit a high yield of 1.656% on Monday, but it closed at
1.623% and hovered around 1.601% for much of the day Tuesday. There were sellers
at 1.60% last week, and 1.55% is another resistance point. The 100-day moving
average is 1.652% and the 200-day moving average is 1.768%,

Further evidence of the extremely tight ranges can be found in the
Bollinger bands which are 1.719% on the high side, 1.554% on the low side and
1.637% right in the middle.

If a deal gets done, most believe it will be at the eleventh hour at the
very end of the year.

But one market veteran, who echoes the displeasure over politicians that
many also feel, said that won’t happen.

“The politicians will want to get it done before Christmas so they can
leave on their break,” he said.

Last week, President Obama offered a plan calling for $1.6 trillion in
additional revenues, $600 billion in entitlement savings and $50 billion for new
infrastructure spending.

The administration is also calling for the extension of Bush era tax cuts
for the first $250,000 of annual earnings, the extension of the two percentage
point payroll tax reduction first approved in 2010, renewal of unemployment
insurance benefits, and a housing refinance provision to help homeowners who are
underwater in their mortgages.

On Monday, the House Republican leadership team sent an offer to the White
House that calls for $1.4 trillion in spending cuts and $800 billion in
additional revenues through tax reform.

The House GOP’s proposed spending cuts include $600 billion from health
care entitlements, $300 billion from other entitlements, $200 billion by using
the chained CPI for indexing benefit programs and $300 billion in additional
discretionary savings.

The $800 billion in revenues “would not be achieved by higher tax rates,”
the House GOP said in a letter to Obama, but through tax reform.

In an interview Tuesday by MNI’s John Shaw, Senate Budget Committee
Chairman Kent Conrad said he is “somewhat encouraged” by the status of the talks
to avert the fiscal cliff and agree on a deficit reduction framework,

Conrad said the introduction of competing plans by President Barack Obama
and House Speaker John Boehner were “needed first steps.”

President Obama said in a interview on Bloomberg TV Tuesday that there is
the “potential” to get a deal done this year but that House Speaker John
Boehner’s offer is “still out of balance.”

He also said he’s willing to make further cuts in entitlement spending and
realizes he won’t get “100 percent” of what he wants.

Obama also said a comprehensive deal on tax reform is not possible this
year but he wants a “down payment” on tax reform this year.

He added that he was not being stubborn on the tax side of the debate but
it boils down to simple math – the wealthiest will have to be taxed at higher
rates.

Look, when the stakes are this high, no one is going to put their best
offer on the table right out of the chute. Both sides clearly have room to
maneuver. But the real question is will they negotiate?

Looking ahead to Friday’s jobs report, median estimates in the MNI poll
look for a gain of 95,000 jobs. But the range is wide from a gain of 171,000
jobs to a gain of only 25,000 jobs.

The unemployment rate will likely stay at 7.9% but some are calling for a
jump back up to 8.1%.

On the data front Tuesday, the November ISM-New York Current Business
Conditions came in at 52.5 after 45.9 in October.

“Future optimism posted one of the largest one-month gains on record,” the
report said.

“The Six-Month Outlook surged to 75.3 in November. Purchase volume shot up,
while employment expanded modestly. Quantity of Purchases, 61.7 in November,
rose to an 18-month high. Employment, 51.6 in November, moved back into positive
territory after contracting last month.”

Wow, do New Yorkers know something the rest of us don’t know?

NOTE: Talk From the Trenches is a daily compendium of chatter from Treasury
trading rooms, as well as some sister market trading rooms, and is offered as a
gauge of the mood in the financial markets. It is not necessarily hard, verified
news.

–MNI New York Bureau; tel: +1 212-669-6434; email: ikennedy@mni-news.com

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