TREASURIES-Bonds rally as Obama spending freeze eyed

Tue Jan 25, 2011 5:17pm EST

Related Topics

* Market rises on news of White House budget freeze plan

* Fed begins two-day policy meeting

* Treasury sells $35 billion in 2-year notes (Updates market action, adds new quotes, changes byline)

By Richard Leong

NEW YORK, Jan 25 (Reuters) - U.S. Treasury debt prices rallied on Tuesday, on the news that President Barack Obama will propose a partial freeze on federal spending, raising hopes the government will narrow its $1.3 trillion budget gap.

Such a move, which Obama will unveil in his State of the Union address later on Tuesday, is seen as positive for the bond market. For details, see [ID:nN25251175]

Analysts said it signals a resolve to tackle a massive federal debt load that rating agencies recently warned will erode U.S. creditworthiness and Treasuries' safe-haven status.

"The U.S. is standing out as a country without a budget reduction plan. This would be a very good point for the (Obama) administration to get ahead of the market on budget concerns. This is good news for the bond market," said Robert Tipp, chief investment strategist with Prudential Fixed Income in Newark, New Jersey.

Treasuries posted their best single-day performance in at least two weeks. The 30-year bond US30YT=RR logged its biggest one-day drop in yield since Dec 31.

The benchmark 10-year Treasury note US10YT=RR finished up 19/32 in price for a yield at 3.33 percent, down from 3.40 percent late on Monday, while the 30-year bond was up 1-3/32 in with its yield slipping to 4.49 percent from 4.56 percent on Monday.

The yield curve flattened as longer-dated Treasuries outperformed shorter-dated issues. The spread between two-year and 30-year yields shrank to 390 basis points from 393 basis points on Monday.

The U.S. Treasury sold $35 billion in two-year notes, part of this week's $99 billion coupon-bearing supply. <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ For graphics on the U.S. government finances, U.S. total debt (w/current debt ceiling) r.reuters.com/xyq67r U.S. total debt (w/1995-1996 debt ceiling showdown) r.reuters.com/pyq67r U.S. budget deficit versus interest rates r.reuters.com/qyq67r U.S. federal revenue versus outlays r.reuters.com/syq67r ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>

As the White House looks for ways to boost economic growth and reduce historically high unemployment, the Federal Reserve began its first policy meeting of 2011. Analysts widely expect the U.S. central bank will keep short-term rates near zero and will pledge its commitment for its $600 billion bond purchase program, known as QE2.

The Fed bought $7.72 billion in medium-term Treasuries due in four to five years. For more, see [FED/]

Some investors downplayed the market boost from the news of the President's budget proposal. They reckoned the day's upbeat backdrop for Treasuries started with data showing a surprise contraction in the British economy in last quarter of 2010. This tempered optimism over faster global economic growth, which has fueled the recent gains in stock markets worldwide. [ID:nLDE70O19B]

"If you take the UK GDP data and the equity run year-to-date which has been pretty strong, Treasuries may be oversold," said Evan Moskovit, head of U.S. fixed income at Sun Capital Advisers at Wellesley Hills, Massachusetts.

In addition to President Obama's State of the Union address at 9 p.m. EST (0200 GMT, Wednesday), traders will prepare for a $35 billion auction of five-year debt, followed by the Fed's policy statement.

This Fed meeting is one in which two of the central banks' most vocal critics become voting members of the policy-setting Federal Open Market Committee. But Fed watchers think the critics may curb their dissents for the time being.

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