Bonds fall as CIT rescue hopes boost stocks

By Burton Frierson

NEW YORK (Reuters) - U.S. government bonds fell on Monday, pushing benchmark yields near one-month highs, as the outlook for stocks brightened after troubled lender CIT Group Inc CIT.N clinched a deal over the weekend to avoid bankruptcy.

CIT's board signed off on a deal late Sunday for $3 billion in rescue financing from a group of bondholders, a source close to the situation said.

The deal was seen as another sign the U.S. financial system was slowly emerging from its worst crisis since the Great Depression, a trend favoring riskier assets such as stocks at the expense of safe-haven Treasuries.

"That's positive news, not for Treasuries but for CIT bonds of course," said Frank Hsu, director of global fixed income at Fimat in New York.

A person close to the matter said CIT may announce details of the agreement on Monday.

The benchmark 10-year note was last down 5/32 in price, pushing its yield up to 3.68 percent from 3.65 percent at Friday's close.

During the session, losses in Treasuries pushed 10-year yields up as far as 3.72 percent, their highest since late June.

Helping Treasuries cut the worst of their losses, Chinese Premier Wen Jiabao said China will maintain a "basically stable" yuan at a reasonable and balanced level.

Traders said though the statement was a reiteration of the country's long-standing description of its exchange rate policy, it was positive for Treasuries since it meant China would have to keep buying U.S. assets to maintain the status quo.

"They want to maintain a stable currency mechanism," Hsu said about China. "That means they have to continue to buy Treasuries."

The Chinese yuan has been virtually pegged to the U.S. dollar over the past year as a defense against the financial crisis, but some analysts think that Beijing will resume gradual appreciation next year as the Chinese economy strengthens.

News of the CIT deal starts off a quiet week for economic data that will see markets focus closely on earnings reports and their effect on Wall Street.

For the bond market, Federal Reserve Chairman Ben Bernanke's semiannual monetary policy testimony on Tuesday and Wednesday to Congressional committees will be the highlight of the week.

The 30-year long bond fell 7/32 to yield 4.56 percent versus 4.54 percent on Friday.

(Reporting by Burton Frierson; Editing by Padraic Cassidy)