January 2, 2013 / 7:21 PM / in 5 years

TREASURIES-Benchmark yields touch 3-month highs on budget deal

* Deal to avert "fiscal cliff" spurs risk-on trade
    * Benchmark yields climb to highest since mid-Sept
    * Worries over debt ceiling seen containing selloff

    By Chris Reese
    NEW YORK, Jan 2 (Reuters) - U.S. benchmark 10-year Treasury
yields hit their highest in over three months on Wednesday after
lawmakers approved a deal that prevented a round of automatic
budget cuts and tax hikes that could have tipped the world's
largest economy into recession.
    The Republican-controlled House of Representatives approved
a bill late on Tuesday that will raise taxes on top earners,
avoiding a "fiscal cliff" of $600 billion in higher taxes and
decreased spending. 
    Relieved investors dumped safe havens, such as U.S.
government debt, to pour money into higher-yielding, riskier
assets, such as equities.
    "The House passed the Senate's last-minute deal overnight
... sparking a substantial risk-on move that has Treasuries on
the back foot," said John Briggs, Treasury strategist at RBS
Securities in Stamford, Connecticut.
    Benchmark 10-year Treasuries were trading 23/32
down in price to yield 1.837 percent, up from 1.76 percent late
Monday. Yields touched 1.86 percent on Wednesday, the highest
since mid-September.
    Thirty-year Treasury bonds were trading 1-25/32
lower in price to yield 3.045 percent, up from 2.95 percent late
Monday. Bond yields traded at 3.06 percent early in the session,
at the highest also since mid-September.
    Indeed, yields may rise further if data, including the non
farm payrolls report for December due out on Friday, show the
U.S. economy is improving.
    "Jobs growth probably accelerated in December, as a few more
employees finally returned to work after the disruptions caused
by superstorm Sandy," said Paul Dales of Capital Economics.
    The bearish tone in Treasuries was supported on Wednesday by
data from the Institute for Supply Management showing U.S.
manufacturing expanded slightly last month after an unexpected
contraction in November. 
    "Even with all the negative headlines surrounding the fiscal
cliff, we still managed to improve on the month and this shows
the underlying resilience of manufacturing, which continues to
add modestly to the economy over the course of the year," said
Tom Porcelli, chief U.S. economist at RBC Capital Markets in New
    However, analysts said a massive risk-on selloff in U.S.
debt was unlikely. In addition to further fiscal tightening,
lawmakers must still agree over the next few weeks on raising
the government's borrowing limit.
    "Higher tax rates will bring slower growth going forward and
(investors) view the recent selloff as a decent opportunity to
add duration," said Tom di Galoma, managing director at Navigate
Advisors LLC in Stamford, Connecticut.  
    The Federal Reserve's loose monetary policy is also expected
to keep yields relatively subdued for a long period, especially
on short-dated paper.

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