TREASURIES-U.S. debt prices rebound on debt limit concerns

LONDON Fri Jan 18, 2013 6:50am EST

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LONDON Jan 18 (Reuters) - U.S. bond prices rose on Friday, with concerns over the debate about raising the nation's debt ceiling prompting investors to snap up the paper cheapened by this week's forecast-beating economic data.

* Housing starts grew at their fastest pace in over four years in December, while the number of Americans filing new claims for unemployment benefits in the past week fell to a five-year low, data showed on Thursday.

* Slightly better-than-expected Chinese economic growth data also weighed on Treasuries in Asian trade, pushing 10-year yields to within a whisker of 1.90 percent.

* That level, roughly the middle of the trading range seen for the most part of this year, lured buyers in European trade. The risk that the United States might default if it does not raise its borrowing limit in the next few weeks is likely to ensure buyers will come back to the market at any dip in price, analysts said.

* Yields on some U.S. debt maturing in February were up by as much as 20 basis points on the day, although trading was volatile. Investors see the U.S. debt ceiling as a temporary problem, however, trusting the world's biggest economy will pay back longer-dated debt and still regarding its large and liquid debt market as one of the safest places for investors to park their cash.

* T-note yields were last 2 basis points lower at 1.8644 percent, while T-note futures were 3/32 higher at 131-03/32.

* "We had a very upbeat day yesterday and to a certain extent we now see markets taking a step back and reality sinking in again," Rabobank strategist Philip Marey said.

"The underlying story is that the U.S. is recovering and the recovery is gaining in strength ... but the fiscal policy uncertainty is holding it back at the moment. There are two opposing forces at the moment."

* Markets were expecting the University of Michigan index on consumer sentiment to fit in with the recent trend of stronger data. But Marey said any rise in yields after its release is likely to be temporary as worries about the debt ceiling linger.

* Data firm Markit said the cost to insure U.S. debt against default as shown by five-year credit default swaps was 1 basis point higher on the day at 44 bps. That meant it cost 44,000 euros annually to buy 10 million euros of protection against a U.S. default using a five-year CDS contract.

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