December 17, 2012 / 2:25 PM / 5 years ago

TREASURIES-U.S. debt slips on signs of budget talks progress

NEW YORK, Dec 17 (Reuters) - U.S. Treasury prices slipped on Monday as U.S. politicians took a small but significant step towards averting the wave of tax hikes and spending cuts that investors fear could hurt economic growth next year.

Republican House Speaker John Boehner proposed an increase in taxes that, while still far short of what President Barack Obama is seeking, represented the first real movement in “fiscal cliff” negotiations ahead of a Dec. 31 deadline.

But price moves were far from dramatic.

“We expect a continued range trade as Washington sorts out budget issues,” said William O‘Donnell, head of U.S. Treasury strategy at RBS Securities in Stamford, Connecticut.

Treasuries prices were unmoved by a negative December reading on the U.S. Empire State Manufacturing Report, which Decision Economics economist Pierre Ellis said reflected “stagnation, or creeping decline as against the hint of improvement that was expected.”

Otherwise, traders were positioning for a busy week of data releases, auctions, and purchases by the Federal Reserve.

“Since the 30-year auction on Thursday, the curve has been flattening and we expect this flattening to continue and be supporting this week by supply in 2-year notes, 5-year nominals and TIPS, and 7s, offset by a 10-year purchase, a 20-year purchase, and three 30-year purchases from the New York Fed,” said Chris Bury, co-head of U.S. rates trading at Jefferies & Co in New York.

“By the time Wednesday’s seven-year note auction comes around, we anticipate taking off our flattening position and transforming it into an outright long in 5s and 7s,” he said.

O‘Donnell observed that 10-year Treasuries were “nearing minor support” in the 1.75 percent yield area that held in late October to early November.

“Investors should look for dips to buy Treasuries,” he said. “We expect a continued range trade as Washington sorts out budget issues, but now that intermediate and long-end yields are near range supports, investors’ thoughts should shift to short covering or dip buying.”

O‘Donnell cited first support for 10-year notes at 1.75 percent and stronger support at 1.85 percent.

Meanwhile, though, the hint of progress in Washington weighed on Treasuries, which act as a safe haven and benefit from uncertainty over the negotiations. U.S. 10-year Treasury prices were down 4/32, their yields rising 2 basis points from late Friday to 1.72 percent.

Japanese election results were also said to weigh slightly on U.S. debt. A landslide victory for Shinzo Abe raised the prospect of more aggressive monetary stimulus from the Bank of Japan, which weighed on low-risk government bonds, including Treasuries and German Bunds.

As trading activity reduces into the Christmas holiday period, focus would remain on the fiscal cliff talks, with new Treasury supply the only other diary item likely to influence price action this week, market participants said.

The U.S. Treasury sells two-year debt on Monday, with five and seven-year note sales on Tuesday and Wednesday.

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