February 12, 2013 / 4:20 PM / in 5 years

TREASURIES-Prices fall before supply, spending cuts in focus

* Prices fall before first of $72 bln new debt sales
    * Spending cuts due in March may increase demand for bonds
    * Barclays sees 10-year yields falling to 1.80 percent

    By Karen Brettell
    NEW YORK, Feb 12 (Reuters) - Prices of U.S. Treasuries fell
on Tuesday as dealers and investors prepared to absorb $72
billion in new debt supply this week.
    Investors are also increasingly turning their focus to the
so-called sequestration spending cuts that are due to kick in
next month unless Congress reaches a deal to avoid them, which
may cap weakness in U.S. government bonds.
    The Treasury will sell $32 billion in three-year notes on
Tuesday, its first sale of coupon debt this week, followed by
$24 billion in 10-year notes on Wednesday and $16 billion in
30-year bonds on Thursday.
    "I think the market is trying to build a concession for the
auction process," said Tom Tucci, head of Treasuries trading at
CIBC in New York.
    Benchmark 10-year notes fell 5/32 in price to
yield 1.98 percent, up from 1.96 percent late on Monday.
    The notes traded at yields of around 2.01 percent in the
"when-issued" market, which indicates where
traders expect the new notes to price.
    Tucci says the notes would represent good value at around
2.02 percent or 2.03 percent, which is the top of their recent
trading range, noting that the approaching date of the sequester
and continued Federal Reserve bond buying make a break above
this range unlikely in the near term.
    Analysts at Barclays see Treasuries yields as likely to fall
in coming weeks as more investors focus on the probability that
the $85 billion of spending cuts will be implemented on March 1.
    "I think there has been a lot of complacency. It would be a
30 basis point hit to GDP, which isn't really penciled in by a
lot of people." said Rajiv Setia, head of U.S. rates research at
Barclays in New York.
    The issue raises a dilemma for lawmakers as the
implementation of the cuts threatens to slow economic growth,
though the failure to stabilize the country's rising debt levels
would increase the prospect of further U.S. ratings downgrades
and pose longer-term problems for the economy.
    Treasuries yields surged in January after a last minute
agreement to avoid the "fiscal cliff" spurred risk taking and
reduced the safety demand for U.S. bonds, though Barclays sees
this selloff as overdone.
    "The selloff in rates since the fiscal cliff deal has
clearly overshot," said Setia. "I think we'll go through
medium-term austerity in the U.S.  We are the only developed
country that hasn't implemented a program."
    Benchmark 10-year notes yields jumped from 1.70 percent at
year-end as high as 2.06 percent on Feb. 4 before falling back
to 1.98 percent.
    Setia said that there is resistance at around 1.90 to 1.92
percent, and if yields drop back below this level, they are
likely to fall further to around 1.80 percent.
    Barclays sees the notes ending the year at around 1.60
percent as investors adjust to slower growth than is currently
    President Barack Obama's State of the Union address will be
closely watched on Tuesday night for signs of whether Congress
is likely to reach a deal to avert cuts. 
    Wednesday's retail sales data will also come under scrutiny
to see if a payrolls tax hike that came into effect at the
beginning of the year is weighing on consumer spending.
    The Federal Reserve bought $3.31 billion in debt due
2020-2022 on Tuesday as part of its ongoing bond purchase
program meant to stimulate the economy.

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