TREASURIES-U.S. bonds slump as upbeat housing data spur sales

Thu Jan 17, 2013 4:05pm EST

Related Topics

* U.S. housing starts rise to four-year high in December

* Filings for jobless benefits fall to five-year low

* Talk of investors shifting cash into stocks from bonds

* Debt ceiling debate, bold Japanese policy curb bond losses

By Richard Leong

NEW YORK, Jan 17 (Reuters) - U.S. government debt prices fell on Thursday, as surprisingly strong data on the housing market raised hopes of the U.S. economy accelerating, and spurred investors to buy stocks and growth-oriented assets and sell low-risk bonds.

News about the Bank of Japan pursuing a program of open-ended asset purchases to help its economy, similar to the one the Federal Reserve has implemented, limited the drop in Treasuries prices.

Benchmark Treasury yields rose for the first time in five sessions after hitting their lowest levels in two weeks on Wednesday on worries about a protracted fight over raising the $16.4 trillion federal debt limit.

Earlier this month, they rose near 2 percent, an eight- month high.

"The market is finding it hard to ignore the better economic data and today we had the housing starts numbers," said Robert Tipp, chief investment strategist at Prudential Fixed Income in Newark, New Jersey.

The U.S. Commerce Department said home builders broke ground at an annualized rate of 954,000 units in December, which was the fastest monthly pace in four years.

Government data also showed the number of Americans filing new claims for unemployment benefits fell to a five-year low last week, but the Labor Department said the drop stemmed largely from seasonal factors, not dramatic improvement in the jobs market.

Traders brushed off a disappointing report on U.S. Mid-Atlantic business activities from the Philadelphia Federal Reserve.

Still the encouraging housing data were the catalyst for some investors to shift money into stocks from Treasuries in an effort to achieve higher returns, analysts and traders said.

"We are seeing some rotation out of fixed income into equities," said Larry Milstein, head of government and agency trading with R.W. Pressprich & Co. in New York.

Benchmark 10-year notes fell 15/32 in price to 97-25/32 with their yield rising to 1.873 percent, up 5.5 basis points from late on Wednesday.

The 30-year bond dropped 1 point to 93-28/32. The 30-year yield rose 5.3 basis points from late Wednesday to 3.064 percent.

On Wall Street, the Standard & Poor's 500 index was up 0.8 percent on the unexpectedly large rise in housing starts and better-than-expected results from online marketplace eBay .

DEBT CEILING WORRIES LINGER

While the optimistic housing data took center stage on Thursday, worries about a contentious fight on the federal debt ceiling persisted.

Just over two weeks after the bitter budget negotiations to avert the 'fiscal cliff' -- a package of automatic tax hikes and spending cuts which economists warn could cause a U.S. recession, traders have been bracing for another standoff between U.S. President Barack Obama and Republican lawmakers.

There have been signs this week the two major U.S. political parties might reach a compromise so the government's borrowing cap will be raised so it will not default on its debt as early as late February.

U.S. House Budget Committee Chairman Paul Ryan said on Thursday his Republican party is considering pressing for only a short-term extension of U.S. borrowing authority.

A U.S. default will hurt the long-term credit rating and the appeal of its debt to investors and foreign central banks, but traders have been more focused on this possible outcome as a negative for the stock market and the economy.

The 10-year Treasury yield will likely hold within the trading range of 1.75-2.00 percent it has established since the start of the year until the debt ceiling is raised.

"We are not going to trade out of this range until we get a resolution," said R.W. Pressprich's Milstein.

In the credit default swap market, the five-year cost to insure against a U.S. default hovered at 44 basis points, its highest level since August 2011 during the first debt ceiling fight between the White House and Republicans, according to data firm Markit.

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