TREASURIES-U.S. yields around highest since Oct on fiscal talks

LONDON Tue Dec 18, 2012 5:04am EST

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LONDON Dec 18 (Reuters) - U.S. Treasury yields steadied near their highest levels since October on Tuesday as U.S. lawmakers edged closer to a deal to avert a fiscal crisis in early 2013.

* U.S. borrowing costs over ten years were flat at 1.78 percent after rising to 1.796 percent in Asian trading - its highest since Oct. 26.

* Thirty-year yields were little changed at 2.95 percent, a whisker away from levels hit overnight at 2.97 percent - also its highest since Oct. 26.

* The sell-off was led by signs of progress in U.S. debt negotiations as, according to a source familiar with the talks, President Barack Obama made a counter-offer to Republicans that included a major change in position on tax hikes for the wealthy and helped narrow the differences between the two sides.

* Bond markets have been sensitive to the U.S. budget talks, with economists worried that a failure to reach a deal to avert a bout of tax hikes and spending cuts that will be triggered early next year would tip the world's largest economy back into recession.

* "We haven't got a budget deal in place, but at least there are signs of movement between the Democrats and the Republicans, and the market is ever hopeful that an agreement will be achieved before the end of the year," said Nick Stamenkovic, bond strategist, at RIA Capital Markets in Edinburgh.

* "With ten year yields now at 2-month highs, investors seem to be taking a pause for breath, awaiting any further news on the fiscal front," he added.

* Traders said any sell-off related to U.S. fiscal talks could be limited by investors' general appetite for safe-haven Treasuries as the year draws to an end. Those opposing forces should see 10-year yields trade in the low 1.60 percent area at the end of 2012, one trader said.

* "If there is a compromise, and there is a deal, the market is going to take that as positive, there will be weakness in fixed income," the trader said. But he added: "I still think the market is going to want to be long Treasuries into the end of the year."

* The Treasury market also faces a bout of supply this week. After lukewarm demand at a two-year bond sale on Monday, the government sells another $35 billion in five-year notes on Tuesday, $29 billion in seven-year notes on Wednesday and $14 billion in five-year Treasury Inflation-Protected Securities (TIPS) on Thursday. (Reporting by Ana Nicolaci da Costa and Alistair Smout/Chris Pizzey, London MPG Desk, +44 (0)207 542-4441)

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