May 16, 2008 / 1:34 PM / 11 years ago

TREASURIES-Bonds sell off on housing starts' rebound

* Surprise housing starts jump batters bonds

* Safe-haven bid on wane

* Year-end U.S. rate hike still priced in

NEW YORK, May 16 (Reuters) - U.S. Treasury debt prices fell on Friday after the biggest monthly jump in housing starts in two years hinted that the housing market might not be crumbling as much as expected, taking bond traders by surprise.

Yet analysts remained skeptical that one report on breaking ground to build new homes might be an aberration and is unlikely to signal a bottom to the steady slide in house prices which threatens to slam the brakes on U.S. consumer spending.

That view checked the severity of government bonds’ sell-off and kept yields within recent ranges.

The benchmark 10-year Treasury note’s price fell 15/32 for a yield of 3.88 percent US10YT=RR, compared with 3.85 percent before the housing data and 3.82 percent late Thursday. Bond yields move inversely to their prices.

“The (housing) number came in stronger than what the Street had expected, so that’s why we are seeing some pressure on Treasuries,” said George Adell, fixed income strategist with Commerce Capital Markets in Jupiter, Florida.

U.S. interest rate futures traded fairly steady, showing that a 25-basis-point rate hike remained priced in for the end of the year.

The two-year Treasury note’s price was down 5/32 for a yield of 2.52 percent US2YT=RR, compared with 2.43 percent late Thursday.

“There has been a little more selling in Treasuries, but nothing that has violated any major levels. We have noticed over the past couple of days that two-year yields above 2.50 percent have tended to draw in buyers,” said Josh Stiles, bond strategist and managing director with research consultancy IDEAglobal in New York.

Short maturities respond closely to expectations for central bank interest rate moves.

“Some people think the Fed will be normalizing next year and that the neutral rate on fed funds would be around 4 percent, so there is some sense of vertigo down here if you believe that,” said Stiles.

However, “The more important turnaround in housing has to come from prices and the pace of buying in housing rather than starting new houses,” Stiles said. “This number is going back down in the coming months. It is not a great picture (for housing).”

A steady flow out of safe-haven Treasuries into stocks and non-government bonds over the past two weeks as investors have embraced a little more risk continued to take a toll on Treasuries on Friday.

Investors’ intermittent concerns about elevated food and energy prices are also weighing on long maturities’ prices. U.S. crude oil scaled new record highs above $127 per barrel on Friday.

“I think we are at a point where people have recognized that the economy is not going to go into a severe recession,” said Benjamin Halliburton, chief investment officer at Tradition Capital, an asset management firm in Summit, New Jersey.

“The mortgage and credit crisis isn’t going to pull us into a deep recession, and we might float by without any recession at all,” Halliburton said. “The reach-for-safety trade is over and is now starting to unwind.” (Reporting by John Parry and Richard Leong; Editing by Jonathan Oatis)

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