TREASURIES-Prices near flat as gov't debt ceiling debate looms

Wed Jan 9, 2013 4:25pm 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 and Chris Reese
    NEW YORK, Jan 9 (Reuters) - Prices for U.S. Treasuries
traded near flat on Wednesday, with yields off last week's
eight-month highs but still within recent ranges, as looming
debt ceiling talks kept investors wary.
    While analysts called a $21 billion auction of 10-year notes
weak, Treasuries pared gains on the results and saw choppy
trading in the New York afternoon.
    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
flat in price, their yield at 1.864 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 could be only 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 could 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 2/32
lower in price, their yield at 3.069 percent. Thirty-year bond
yields on Friday rose to 3.18 percent, the highest since late
April, and some analysts were calling for a further pullback in
the yield.  
    Separately, U.S. overnight lending rates continued their
2013 downward trajectory. That coincides with the end of the
Fed's "Operation Twist" stimulus program, under which the
central bank was selling shorter-dated debt and using the
proceeds to buy longer-dated Treasuries.
    The interest rate on overnight repurchase agreements
 were last quoted at 0.17 percent, the lowest since
July 19 and down from 0.18 percent on Tuesday. The rates have
been falling steadily since touching a recent high of 0.4
percent on Dec. 31.
    The Fed replaced "Operation Twist," which expired at the end
of December, with an open-ended program under which it is buying
$45 billion per month of longer-dated Treasuries. As part of the
new program, the Fed on Wednesday bought $1.55 billion of
Treasuries maturing 2036 through 2042.
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