TREASURIES-Bittersweet debt limit deal keeps Treasuries in check

LONDON Wed Jan 23, 2013 6:06am EST

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LONDON Jan 23 (Reuters) - U.S. debt prices held firm on Wednesday on expectations a proposed debt-limit extension will be approved, with the prospect of nearly four more months of uncertainty balancing out short-term relief at the measure.

Treasury futures were steady at 132-8/32, with 10-year benchmark yields at 1.83 percent -- comfortably within their recent 1.8 to 1.9 range.

Market participants said current Treasury prices were anticipating that a proposal to extend the U.S. debt limit until May would be passed, based on signals from Republican leaders on Tuesday.

"The debt ceiling being extended should be in the price here... to some extent we're at the mercy of stocks and they may prove a near-term negative for bonds after the bill gets passed but overall I'd say we're well priced," a trader said.

Longer-term, the extension of the debt limit, which would prevent the United States defaulting on its debts over the coming months, was seen as prolonging the sense of uncertainty in markets and a risk to U.S. economic growth.

"Although the immediate threat of a default has gone, at the same time the deadline has moved up to May and we're going to be stuck with fiscal uncertainty for longer," said Philip Marey, strategist at Rabobank in Utrecht.

That uncertainty would filter through into economic data over the coming months, supporting U.S. debt around current levels, as businesses put off investment decisions and consumers feel the hangover from the expiry of tax breaks.

"If businesses and consumer spending are being held back for various reasons then I don't think the U.S. economy will grow very rapidly in the beginning of the year... all that will keep markets from getting too exuberant," Marey said.

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