Treasuries slip as stock gains curb safety bid

NEW YORK (Reuters) - U.S. Treasuries prices slipped on Wednesday as the prospect of the IMF raising more funds to ease the euro zone debt crisis and higher-than-forecast earnings from Goldman Sachs boosted riskier assets like stocks and depressed demand for safe-haven U.S. government debt.

Goldman Sachs Group Inc's (GS.N) fourth-quarter profit fell 56 percent but the investment firm beat Wall Street expectations by cutting costs and taxes, pushing its shares 6 percent higher. U.S. banks focused on business and consumer lending did better in the fourth quarter, reporting increased demand for loans from businesses.

The International Monetary Fund estimates it needs to raise $600 billion in new resources to lend to countries to help them with the repercussions of the euro zone debt crisis, IMF sources told Reuters on Wednesday.

The IMF reports weighed slightly on Treasuries prices, said David Ader, head government bond strategist at CRT Capital Group in Stamford, Connecticut.

Meanwhile, stocks and bond yields moved in lock-step, with yields rising along with stocks.

"The contour of the last five or 20 days on a minute-to-minute basis is that you see Treasury yields go down when stocks go down and go up when stock prices go up," said Robert Tipp, chief investment strategist for Prudential Fixed Income with $240 billion in assets under management.

But other factors are at work, he said.

"We're clearly in the recovery mode from the European crisis," he said. "In the Lehman crisis, the recovery started in the interbank lending market and moved through credit and got to stocks and currencies last.

"In the current crisis, we've seen recovery - ironically - arrive first in some of the peripherals like Ireland from the middle of last year and we may have seen the ultimate crest in many of the other peripherals in the fourth quarter of 2011 along with the bottoming of the stock market," he said.

Elsewhere on the euro zone debt crisis front, private sector creditors return to the negotiating table on Wednesday in Athens in a new attempt to cut Greece's debt in time to avert a disorderly default in March. The loss for investors, which is at the heart of the negotiations, is now estimated at around 60 to 70 percent depending on the coupon, discount rate and maturity.

While investors' preference for stocks on Wednesday worked to the detriment of Treasuries, Byron Carson, managing director, capital markets for Principal Global Investors, said U.S. Treasury yields maintained a "pretty tight" range.

"People see the Fed being on hold for a long time so volume is a lot lower than normal for this time of year," he said. "One large trade can move the market."

Benchmark 10-year Treasury notes slipped 6/32, their yields rising to 1.87 percent from 1.84 percent on Tuesday.

Carrying out its 'Operation Twist,' a plan to keep downward pressure on long-term Treasury yields to help stimulate the economy, the Federal Reserve sold $8.74 billion in short-term debt maturing between November 2013 and February 2014. It is expected to buy $4.6 billion in longer-dated Treasuries - maturing from February 2020 to November 2021 - in the afternoon.

"Our view is that the global economic outlook will remain challenged and that the ... compression of the yield curve will continue," said William O'Donnell, head of U.S. Treasury strategy at RBS Securities, referring to the narrowing differences between short- and long-term yields. "Our activist Fed will keep market rates low for a long time," he said.

In that environment, the appropriate trading strategy is for longer-term investors to use back-ups as an opportunity to buy longer-dated maturities, he said.

"Sell into resistance levels that lie nearby and play the ranges," he said, citing resistance beginning at 1.867 percent to 1.80 percent on the 10-year note yield.

The U.S. Treasury Department reported a big rebound in purchases of U.S. fixed-income securities in November, noted Thomas Simons, money market economist at Jefferies & Co.

Foreign investors purchased $65 billion in long-term fixed income securities: $54 billion in Treasury notes and bonds, $6.2 billion in agencies and mortgage-backed securities, and $4.8 billion in corporate bonds.

Treasury purchases were split about evenly between private investors and official institutions as the former bought $30.3 billion and the latter purchased $23.7 billion.

Reports on U.S. producer prices and industrial production evoked no discernible reaction in the cash bond market but the yield on U.S. 10-year Treasury Inflation Protected Securities touched a record low on Wednesday on the unexpected news that U.S. producer prices fell in December.

Conversely, the 10-year TIPS breakeven rate, a gauge of long-term inflation expectations, turned higher because the report showed core producer prices rose more than expected, signaling that underlying inflation is not as benign as previously thought.

The bid yield on 10-year TIPS touched minus 0.244 percent, surpassing the previous intraday record of minus 0.2150 percent set on Tuesday, according to Tradeweb.

The 10-year breakeven rate, or the spread between 10-year TIPS yield and regular 10-year Treasury yield, was quoted at 2.05 percent, up nearly 2 basis points.

The Labor Department said on Wednesday its seasonally adjusted index for prices received by farms, factories and refineries fell 0.1 percent. Economists had expected an increase of 0.1 percent.

The PPI core rate, which excludes volatile food and energy prices, rose 0.3 percent last month, the biggest rise since July. It was above economists' forecast for a 0.1 percent gain.

(Additional reporting by Richard Leong; Editing by James Dalgleish)