TREASURIES-Bond prices fall on Spain aid, Chinese data

Mon Dec 3, 2012 10:51am EST

Related Topics

* Spain seeks EU aid for its wobbly banking sector
    * Chinese manufacturing regains growth after a year
    * ISM U.S. factory sector unexpectedly contracts in Nov
    * U.S. 10-year note yield flirts with 100-day MA


    By Richard Leong
    NEW YORK, Dec 3 (Reuters) - U.S. Treasuries prices fell on
Monday after news that Spain is seeking help for its troubled
banks and better-than-expected data on Chinese manufacturers
reduced safe-haven demand for  less-risky government debt.
    Traders also blamed the market sell-off on investors
shifting cash into stocks from bonds in a reaction to a research
report from Goldman Sachs, which upgraded its short-term global
outlook on equities. 
    "There's a reallocation into equities from bonds. The
month-end flatteners are being unwound," said John Brady, senior
vice president of interest rate futures sales at R.J. O'Brien
and Associates in Chicago.
    The market's losses were limited by nagging worries about
the lack of progress in budget talks in Washington and the bumpy
debt negotiation between Greece and its lenders.
    Benchmark 10-year Treasury notes were 10/32
lower, yielding 1.648 percent, up 3.6 basis points from late on
Friday. The 10-year yield flirted with its 100-day moving
average of 1.6519 percent earlier following an 8-basis-point
decline last week, according to Reuters data.
    The three U.S. stock indexes opened higher, with the
Standard & Poor's 500 rising for a fourth straight
session. 
    The initial selling in Treasuries stemmed from data showing
Chinese manufacturing returned to growth in November for the
first time in over a year. 
    Bonds' losses grew on news that Spain formally requested the
disbursement of 39.5 billion euros ($51.4 billion) of European
funds to recapitalize its crippled banking sector.
 
    Even with Monday's fall, U.S. bond prices have bounced in a
tight range since the U.S. presidential election nearly a month
ago on the likelihood of a contentious process between President
Barack Obama and Republican lawmakers to avoid the "fiscal
cliff."
    The absence of a budget deal before year-end would cause a
fiscal contraction -- a series of automatic tax hikes and
spending cuts worth $600 billion -- and possibly tip the U.S.
economy into a recession, economists say.
    U.S. business executives have cut back spending and hiring
on possible fallout from a failure to reach agreement.
    The Institute for Supply Management said its manufacturing
index unexpected fell in November to the lowest level since July
2009. The report contradicted data released earlier by Markit 
showing factory activity grew modestly last month.
  
    Tepid growth and high unemployment will likely cause the
Federal Reserve to stick with its ultra-loose monetary policy. 
    "It has set a very high bar to stop easing. We have to see a
substantial improvement in the labor market, and we haven't seen
that," said Stephen Stanley, chief economist at Pierpont
Securities in Stamford, Connecticut.
    The U.S. central bank is widely expected to decide at its
policy meeting next week that it will continue to buy
longer-dated government debt in 2013 in an effort to hold down
mortgage rates and other long-term borrowing costs to support
the economy. Its "Operation Twist" program, which involves
selling short-dated Treasuries and buying longer-dated issues on
the open market will expire at the end of the month.
    The Fed plans to sell $7 billion to $8 billion in
short-dated issues at 11 a.m. (1600 GMT) for Operation Twist
after buying $16.8 billion in long-dated debt last week.
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