TREASURIES-U.S. debt slips on signs of budget progress

Mon Dec 17, 2012 12:44pm EST

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By Ellen Freilich

NEW YORK Dec 17 (Reuters) - U.S. Treasury prices fell on Monday as U.S. politicians negotiated ways to avert tax hikes and spending cuts that investors fear would hurt economic growth next year.

Prices dipped to session lows when a White House official said President Barack Obama and Republican House Speaker John Boehner met at the White House on Monday to discuss the "fiscal cliff."

An aide to Boehner said the two met for 45 minutes, adding that no details would be released about the private discussion.

"Treasuries started to slide as the headlines about the Obama and Boehner meeting hit the tape," said Michael Cloherty, head of U.S. interest rates strategy at RBC Capital Markets LLC.

Stocks climbed on that news to the detriment of safe-haven U.S. debt, which draws buyers when the budget negotiations look more precarious.

Over the weekend, Boehner proposed an increase in taxes that, while still far short of what Obama is seeking, represented the first real movement in "fiscal cliff" negotiations ahead of a Dec. 31 deadline.

"With the weekend news about Boehner's concessions, and the news today that Boehner and Obama are meeting about the fiscal cliff, there is increased optimism about a deal," said Thomas Simons, money market economist at Jefferies & Co. in New York.

Amid the hints of possible progress, U.S. 10-year Treasury prices slipped 9/32, their yields rising 4 basis points from late Friday to 1.74 percent.

William O'Donnell, head of U.S. Treasury strategy at RBS Securities in Stamford, Connecticut, said 10-year Treasuries were "nearing minor support" in the 1.75 percent yield area that held in late October to early November.

"Investors should look for dips to buy Treasuries," he said. "We expect a continued range trade as Washington sorts out budget issues."

O'Donnell cited first support for 10-year notes at 1.75 percent and stronger support at 1.85 percent.

Meanwhile, traders positioned for a busy week of data releases, Federal Reserve purchases, and Treasury auctions, the latter starting with the Treasury's sale of two-year notes at 1 p.m. (1800 GMT).

Two-year Treasury sales have recently drawn strong receptions and this week's sale is expected to fit that pattern.

Direct bidding has risen to 24 percent at the last four actions, versus 9 percent in the four auctions prior to those, said Ian Lyngen, senior government bond strategist at CRT Capital Group in Stamford, Connecticut.

Simultaneously, the portion of the auction awarded to investment funds has risen to 25 percent, or $8.8 billion, over the last four auctions, versus 15 percent, or $5.3 billion at the prior four sales, he said.

Buying by foreign accounts in two-year auctions has also been noteworthy, taking 16 percent of the last four auctions, up from 14 percent at the prior four, Lyngen said.

"Momentum has shifted bullishly in the front-end of the curve ... favoring lower yields," he said. "We see initial resistance at the 23-basis-point low-yield mark," he said, citing the gap between 25 bps to 25.4 bps as support.

Two-year Treasury notes were near flat on the day, yielding a quarter of a percentage point.

After its sale of two-year debt on Monday, the U.S. Treasury will sell five- and seven-year notes on Tuesday and Wednesday, respectively.

Japanese election results were also said to weigh slightly on U.S. debt. A landslide victory for Shinzo Abe raised the prospect of more aggressive monetary stimulus from the Bank of Japan, which weighed on low-risk government bonds, including Treasuries and German Bunds.

Treasuries prices were unmoved by a negative December reading on the Empire State Manufacturing Report, which measures factory activity in the New York region. Decision Economics economist Pierre Ellis said the report reflected "stagnation, or creeping decline as against the hint of improvement that was expected."

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