TREASURIES-Prices plunge as tax plan stokes US debt worries

* U.S. tax break plan raises inflation, payment concerns

* Lower prices fail to attract aggressive buying of 3-yrs

* 10-year yield breaks 200-day moving average at 3.10 pct

* 10-year yields set for biggest daily gain since June '09 (Adds buy side comment, updates prices)

By Chris Reese

NEW YORK, Dec 7 (Reuters) - U.S. Treasuries prices plunged on Tuesday, with yields surging above key support levels, as a proposed extension of tax cuts raised concerns over inflation and the costs of the federal government's massive debt burden.

Some analysts saw yields gaining further after Tuesday's price weakness, which marked the biggest selloff since June 2009. The lower prices spurred only average interest in an auction of three-year Treasury notes, ahead of sales of reopened 10-year notes Wednesday and 30-year bonds Thursday.

The selling pushed benchmark U.S. 10-year Treasury notes yields to the highest since June. The 10-year yield touched 3.18 percent after breaking above its 200-day moving average of 3.10 percent and analysts anticipate it could probe support near 3.20 percent and then 3.25 percent.

"The outlook for long-term rates and the yield curve has become somewhat clearer now that the administration and the presumptive Republican leadership on the Hill have come to terms on a plan to extend the Bush-era tax cuts," said Steven Ricchiuto, chief economist at Mizuho Securities in New York.

"Specifically, the trading range on 10-year notes is now expected to rise to 3 percent to 3.25 percent through early next year, instead of the 2.75 percent to 3 percent we had anticipated prior to the compromise being announced. A modest uptick in the trading range on long-term rates reflects the need for higher real yields in light of the fact that the plan will be financed by increased borrowing," he said.

Benchmark 10-year notes US10YT=RR traded 1-24/32 lower in price to yield 3.14 percent, up from 2.93 percent late Monday. Ten-year yields were on track for the biggest single-day rise since June 2009.

The 30-year bond US30YT=RR traded 2-5/32 lower to yield 4.37 percent, up from 4.24 percent late Monday.

Investors moved from bonds into stocks, commodities and other risky assets on the view the tax deal between Democrats and Republicans is a fiscal stimulus for the economy, analysts said. For details see [ID:nN07288652].

"Investors are reacting to the political compromise on tax cuts, to the potential of some uncertainty being lifted. It's a positive development for the U.S. economy so investors are moving into riskier assets," said Michael Cuggino, president of Permanent Portfolio Funds in San Francisco, which has about $9.5 billion of assets under management.

The tax move, intended to help the economy, has a hefty price tag that spooked bond investors. The Congressional Budget Office estimated a two-year extension of tax cuts for all Americans would cost the government about $500 billion in lost tax receipts.

"This (raises a) question about fiscal sustainability," said Keith Blackwell, interest rate strategist at RBC Capital Markets in New York.

Indeed, ratings agencies also seemed to be pondering the ramifications for U.S. debt costs, with Moody's Investors Service saying it was worried the tax cuts could become permanent and Fitch Ratings saying the extension of the tax cuts underscores the need for a "credible plan" to reduce spending. [ID:nN07282425] [ID:nN07293531]

However, little impact was seen in the credit default swaps market, where the cost of insuring U.S. government debt rose to 43 basis points, or $43,000 per year to insure $10 million in debt for five years, from around 40.5 basis points Monday, according to Markit Intraday.

Worries over inflation steepened the yield curve and fueled bids for Treasury Inflation-Protected Securities.

The break-evens, or yield spread, between 10-year TIPS and regular 10-year Treasuries grew to 2.28 percentage points, its widest since May, according to Reuters data.

An auction of $32 billion of three-year notes brought a yield that was slightly higher than expected, meaning buyers were unwilling to pay the price demanded in the open market at the time. The bid-to-cover ratio, a sign of demand, was the lowest since February.

"With technical momentum negative and growth prospects increasing due to the extension of the tax cuts, three-year notes were unable to bring in quite enough buyers to clear their 1:00 p.m. (EST) level," said John Briggs, interest rate strategist at RBS Securities in Stamford, Connecticut, who typified demand in the auction as "generally average."

The Treasury is set to sell $21 billion of reopened 10-year notes on Wednesday, which could set the tone for even higher yields, Briggs said.

"With 10-years up next, the signs remain for a further concession in the market, especially with the important 3.06 percent technical support broken today in 10-year notes," Briggs said. (Additional reporting by Richard Leong; Editing by Kenneth Barry)