TREASURIES-Bonds steady as debt ceiling debate comes into focus

Fri Jan 11, 2013 9:12am EST

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* Prices steady as debt ceiling debate comes into focus
    * Fed will buy $4.75-5.75 bln in notes due 2017-2018
    * Risk-taking in Europe, stocks gains dampen Treasuries
demand

    By Karen Brettell
    NEW YORK, Jan 11 (Reuters) - U.S. Treasuries held steady on
Friday, after digesting $66 billion in new supply this week, as
investors began to turn their attention to impending battles
over the U.S. debt ceiling, which may hold bond yields down even
as economic data improves.
    Treasury debt yields have been largely range bound this
week, after a dramatic jump in the first three days of the year
as investors bet on the prospects of an improving economy and
after minutes from the Federal Reserve's December meeting raised
the possibility that the central bank may end bond purchases
before year-end.
    Concern over new battles in Washington over how to cut
federal spending, reduce the deficit and raise the debt ceiling
is likely to add a safety bid that will hold bond yields down
even as some investors see the overall direction for yields as
still pushing higher.
    "Overall it does feel like rates would like to go higher,"
said James Newman, head of Treasuries and agency trading at
Keefe, Bruyette and Woods in New York. But "the debt ceiling got
in everyone's head, how that will play out, so that is why we
are grinding lower in yields."
    Benchmark 10-year notes were last down 2/32 in price to
yield 1.91 percent, down from a high of 1.98 percent last
Friday. The yields have increased from around 1.70 percent at
year-end.
    Investors will now be closely watching a speech that Fed
Chairman Ben Bernanke is due to give on Monday at the University
of Michigan for any further indications of how long the Fed's
latest bond purchase program will last.
    "He's the one pulling the strings and he's the one that
wants the QE, so we'll see if he counterbalances some of the
hawkish comments," said Newman.
    The Fed will buy between $4.75 billion and $5.75 billion in
notes due from 2017 and 2018 on Friday as part of its latest
quantitative easing program, and it has scheduled Treasuries
purchases for every day of next week.
    Treasuries also firmed earlier on Friday after an
acceleration in China's consumer inflation rate narrowed the
scope for further monetary easing, causing selling pressure in
stock markets and supporting safe-haven instruments such as U.S.
debt. 
    "We had ... disappointing inflation data out of China and
the European equity market has run out of steam this morning -
maybe a bit of profit taking - consequently Treasuries have
recouped some of their losses." said RIA Capital Markets bond
strategist Nick Stamenkovic.
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