TREASURIES-U.S. bonds get safety bid before debt ceiling battle

NEW YORK Tue Jan 15, 2013 9:53am EST

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NEW YORK Jan 15 (Reuters) - U.S. Treasuries prices rose on Tuesday, drawing a safety bid from weaker stock prices, from a prospective battle in Washington over the government's borrowing limit, and from a steady stream of large debt purchases by the Federal Reserve.

A refusal by Congress to raise the debt ceiling would raise the risk that the United States would default on its debt by the spring. Fed Chairman Ben Bernanke urged lawmakers on Monday to lift the country's borrowing limit to avoid a debt default that would put the economy at risk.

Weaker stock prices, as world stock markets stalled near 18-month highs, also fed the bid for safe-haven U.S. debt.

"There's a little bit of a risk off trade," said Thomas Graff, fixed-income portfolio manager at Brown Advisory in Baltimore, Maryland. "It looks like stocks reacting negatively to the wrangling over the U.S. debt ceiling so Treasuries are higher."

The likelihood of the U.S. not raising the debt ceiling and declaring default is "very low," Graff said.

"But a lack of resolution might result in the sequester going through, which would be a bigger fiscal drag than is priced in now; and if growth is slower, that's positive for Treasuries," he said.

Benchmark 10-year notes rose 11/32, their yields easing to 1.81 percent from 1.85 percent on Monday. Thirty-year bonds rose 24/32, their yields easing to 3 percent from 3.04 percent on Monday.

U.S. government data revealed that inflation on the wholesale level was subdued in December, with prices excluding food and energy rising just 0.1 percent, supportive for U.S. Treasuries.

Retail sales, however, were stronger-than-forecast in December, a result that prompted some short-lived profit-taking in Treasuries.

In a question and answer session at the University of Michigan on Monday, Bernanke painted a cautiously optimistic outlook for U.S. growth but did not hint that the Fed would curb its aggressive bond purchases despite speculation - raised by the release of minutes from the Fed's most recent policy meeting - that purchases could end this year.

The minutes led to a sharp selloff in the bond market.

Bernanke said the economy appeared to be responding to the Fed's aggressive easing of monetary policy, but not as fast as the central bank would like.

"The impression Bernanke left was a little more dovish than what the initial reaction to the Fed minutes was," Graff said. "That was probably purposeful on his part. He wanted to make sure the minutes did not communicate the wrong message. We're a good ways away from conditions where any monetary tightening would be necessary."

The Fed has held interest rates near zero since December 2008 and last month decided to keep buying $85 billion worth of Treasury bonds and mortgage-backed securities a month until it saw a significant improvement in the labor market outlook.

On Monday, the Fed bought $1.47 billion in Treasuries with maturities ranging from February 2036 to November 2042.

On Tuesday, as part of its $45 billion monthly purchases of government securities aimed to lower unemployment, it is expected to buy $900 million in Treasuries maturing from February 2023 to February 2031.

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