TREASURIES-Bonds slip as improved consumer sentiment damps safety bid

Fri Nov 9, 2012 12:08pm EST

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By Ellen Freilich

NEW YORK Nov 9 (Reuters) - U.S. Treasuries slipped on Friday as stock gains sparked by improved consumer sentiment whetted investors' appetite for riskier assets at the expense of safe-haven U.S. debt.

U.S. consumer sentiment rose to its highest level in more than five years in November as Americans felt more optimistic about employment prospects and the outlook for the economy, according to a Thomson Reuters/University of Michigan index. Stocks rose slightly on that news.

Traders also noted that current bond market yields are about where they were when a rally stalled in late August and early September.

"It might be difficult to escape this range," said ING trader Jake Lowery, Treasury trader at ING Investment Management in Atlanta, with $170 billion in assets under management.

Benchmark 10-year Treasury notes were down 2/32, leaving their yields at 1.63 percent.

"Bond managers are a little overweight interest-rate risk so a further rally in bonds probably would need to be fueled by asset allocations out of equities," Lowery said.

In sync with the limited gains in stocks and amid concerns about the euro zone economy and potential U.S. fiscal tightening, selling of Treasuries was only tepid.

Markets are focused on what would happen to the economy if and when U.S. federal spending cuts roll in and the Bush-era tax cuts roll off next year, as would occur if no agreement is reached to avert the so-called "fiscal cliff" designed to force a reduction in the U.S. federal budget deficit.

The non-partisan Congressional Budget office has said such an abrupt fiscal tightening could put the economy back into recession and boost the unemployment rate to 9 percent.

Such a scenario would be supportive for bond prices.

President Barack Obama is due to make a statement on the fiscal cliff from the East Room of the White House at 1:05 p.m. EST (1805 GMT). The stance he is expected to take was telegraphed by a top adviser on Thursday who claimed a mandate from Tuesday's election victory to raise taxes on the wealthy.

In a news conference, the leader of the Republican-controlled House of Representatives, Speaker John Boehner, said raising tax rates on the wealthy would slow U.S. job creation, but he also spoke about eliminating loopholes in the U.S. tax code.

"The risk of political brinksmanship and rhetoric around the fiscal cliff is likely to create more uncertainty even if we get more cooperation in the end," ING's Lowery said.

That uncertainty could be supportive for bonds.

Concerns about the euro zone economy also constrained selling of U.S. debt.

Growth in Germany, Europe's largest economy, is likely to slow in the fourth quarter and the first three months of 2013. Industrial production in France, the euro zone's second-largest economy, shrank in October and the country's central bank said it expected to slip into recession at the end of 2012.

Meanwhile, Greece's government must vote on Sunday on its 2013 budget to get access to international aid after Wednesday's tight vote favoring an austerity package totaling 13.5 billion euros. And whether Spain would apply for financial aid was also uncertain. Spain has so far resisted asking for aid.

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