TREASURIES-Prices edge up as debt ceiling debate looms

Wed Jan 9, 2013 3:12pm EST

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* Yields back off eight-month highs reached last week
    * Treasury sells $21 billion of 10-year notes
    * 30-year bond yields seen heading back toward 3 percent

    By Luciana Lopez
    NEW YORK, Jan 9 (Reuters) - Prices for U.S. Treasuries edged
up on Wednesday, taking yields off last week's eight-month highs
but still within recent ranges, as looming debt ceiling talks
kept investors wary.
    Prices dipped briefly after a weak auction of $21 billion
10-year notes but recovered quickly.
    At 1.863 percent, the high yield for the auction exceeded
market expectations, with lower-than-average non-dealer bidding
and bid-to-cover. 
    But analysts said the budget battle in Washington
overshadowed the results of the sale, with investors unsure
where the debate could go and what direction the market could
take.
    "It's the debt ceiling. What's the fight going to look like,
how much spending cuts are we going to get out of that, if any,
and what is it going to mean," said David Ader, head of
government bond strategy at CRT Capital Group in Stamford,
Connecticut. 
    "I think it's going to be a choppy and largely sideways and
indecisive time until then," he said.
    Benchmark 10-year Treasury notes were trading
4/32 higher in price, their yield at 1.850 percent from late
Tuesday's 1.87 percent. Yields on Friday touched 1.98 percent,
the highest since late April.
    Yields have generally been easing since that Friday high
after minutes from the Federal Reserve's December policy meeting
sparked some worries the central bank could pare back its asset
purchases sooner than expected if the economy improves enough.
    Also boosting yields last week, Republicans and Democrats
reached a deal to soften an austerity package scheduled to kick
in at the beginning of the year that might have pushed the
economy back into recession.  
    But the respite from that deal could be merely temporary, as
the compromise only postponed major across-the-board spending
cuts. 
    In addition, the Treasury hit the $16.4 trillion limit on
the amount of borrowing that is authorized by Congress on Dec.
31, and the United States would default on its debt within weeks
 unless Congress raises the limit.  
    The last time policymakers squabbled over the debt ceiling,
in 2011, the United States' AAA credit rating was cut by
Standard & Poor's. 
    With negative outlooks from all three major rating agencies,
investors are worried that the U.S. credit rating could get
dented further if no solution is reached.
    The Treasury has a $13 billion auction of 30-year bonds on
Thursday. The sale of $32 billion of three-year notes on Tuesday
drew strong non-dealer bidding. The high yield was 0.385
percent, in line with expectations. 
    Thirty-year Treasury bonds were trading 8/32
higher in price, their yield at 3.053 percent from late
Tuesday's  3.07 percent. Thirty-year bond yields on Friday rose
to 3.18 percent, marking the highest since late April, and some
analysts were calling for a further pullback in the yield.
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