December 9, 2010 / 6:14 AM / in 7 years

TREASURIES-Steady in Asia,look to consolidate after bruising

* Bond prices edge up in Asia after two-day sell-off

* Some see about 3.0 pct as new pivot for benchmark yield

* 30-year bond auction of $13 billion due later

By Charlotte Cooper

TOKYO, Dec 9 (Reuters) - U.S. Treasury prices rose in Asia on Thursday and futures edged up as the market found some support after a steep two-day sell-off, with some saying the benchmark yield could start to stabilise around 3 percent.

The benchmark 10-year note yield US10YT=RR rose 40 basis points in two sessions after a deal in the U.S. to extend tax cuts sparked concern about inflation and fiscal deterioration.

The yield hit its highest in six months at 3.330 percent on Wednesday but fell to about 3.238 percent on Thursday, and one senior trader expected the correction to continue a little further, with 3.30-3.35 percent expected to be a ceiling for now.

But the market is reassessing the U.S. economic outlook as a result of the plan, which includes the tax cut extension and other measures, and against a backdrop of gradually improving economic data.

“If the economy keeps growing, although it might be a moderate pace, the right level for the long-term interest rate is maybe 3 percent plus,” said Akihiro Nishida, senior fixed-income strategist at Mitsubishi UFJ Morgan Stanley Securities.

“The movement might be a bit quick, too quick, for the market but the current level is not so out of touch.”


Full coverage of tax and deficit debates [ID:nN06200548]

Reuters Breakingviews column [ID:nN08147171]

Government debt graphic


Wednesday’s dip in prices brought some buyers to the table in an auction of $21 billion of reopened 10-year notes, which resulted in a high yield of 3.340 percent, and the senior trader said the market was now a little more confident about where demand lay, after many positions had been flushed out.

The market probably needed to consolidate for a bit, he said. But even before the proposal to extend the tax cuts, people had been considering whether to revise up their growth expectations for 2011 and now might be thinking of growth of 3.0-3.5 percent.

Longer term, some analysts expect the benchmark yield to move above 4.0 percent, but for now the trader expected it to pivot around 3.0 percent.

On the charts, the yield has broken above 3.17 percent, which is a 50 percent retracement of its April-October decline, and the next target is about 3.37 percent, a 61.8 percent retracement of the same move.

Yields have gradually moved higher in the past month, even though the Federal Reserve announced a second round of bond buying early in November to bolster the economy.

Fed officials meet next week to assess the bond buying and are not expected to signal a shift away from the programme. But the market will want to see how the Fed views the outlook as a result of the tax deal. [ID:nN08167483]

Wednesday’s 10-year auction was part of $66 billion of coupon-bearing securities sales this week. Some $13 billion in 30-year bonds will be auctioned on Thursday, also a reopening, and some expect this week’s sell-off may improve demand.

The 30-year bond US30YT=RR rose 3/32 in price to yield 4.452 percent, down about half a basis point from late U.S. trade. It breached 4.5 percent for the first time in seven months on Wednesday, rising as far as 4.51 percent.

The March futures on the 10-year note TYv1 rose 2.5/32 to 120-28, pulling away from a 5-½ month low set on Wednesday. (Editing by Michael Watson)

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