December 3, 2012 / 9:21 PM / 5 years ago

TREASURIES-Bond prices dip on Spain aid, Chinese data

* Spain seeks EU aid for its banking sector
    * Chinese manufacturing regains growth after a year
    * ISM U.S. factory sector unexpectedly contracts in November

    By Ellen Freilich
    NEW YORK, Dec 3 (Reuters) - U.S. Treasuries prices slipped
on Monday after Spain sought help for its banks and data showed
the pace of Chinese manufacturing quickened, damping demand for
safe-haven U.S. debt.
    The market's losses were limited, though, by bumpy debt
talks between Greece and its lenders, worries about budget talks
in Washington, and an Institute for Supply Management (ISM)
survey showing U.S. manufacturing contracted in November.
    "The thing to watch is employment, which was below 50 for
the first time in 38 months," said Bradley Holcomb, chairman of
the ISM manufacturing business survey committee. A reading below
 50 points to contraction. 
    "That, along with inventories being down 5 percentage
points, are signs that businesses are pulling back and not
spending money on employees or inventories," he said.
    The news on Spain damped the bid for safe-haven U.S.
government debt, as did the data showing revived growth in
China, said Jason Rogan, director of Treasuries trading at
Guggenheim Partners in New York.
    But the bond market was "fatigued" and didn't muster a lot
of buying forces on the bond-friendly ISM data, he said.
    Benchmark 10-year Treasury notes were down 2/32 
in late afternoon trade, their yields edging up to 1.63 percent
from 1.62 percent late on Friday. The 10-year yield flirted with
its 100-day moving average of 1.6519 percent earlier following
an 8 basis-point decline last week, according to Reuters data.
    The market seemed to have given up responding to every
utterance from Washington on the potential year-end fiscal
crisis known as the fiscal cliff. Broad-based tax increases and
spending cuts could automatically take effect after Dec. 31 if
no other agreement is reached before then.
    "We're trying not to get caught up in every statement," said
Steve Van Order, fixed-income strategist at Bethesda, Md.-based
Calvert Investments with $12 billion in assets under management.
   "We've looked at it. We know the different scenarios. We have
our view in place in terms of what we are doing with our
    Van Order said market volatility was pretty low.
    "The yield ranges we've had since August have held pretty
well," he said "The Treasury auctions last week went great."
    Investors have absorbed debt issued by corporations as well
as the debt sold by the U.S. government.
    The U.S. high-grade market began what could be another
record-breaking month on Monday with December volume expected to
be in the $50 billion area, according to IFR, a Thomson Reuters
unit. The record for December was $51.04 billion in 2007.
    "Ever since (President Barack) Obama got re-elected, people
expect near zero  short-term interest rates and are reaching for
spread," Van Order said. "Corporations had massive, record
November issuance and that got absorbed pretty well."
    Early selling in Treasuries stemmed from data showing
Chinese manufacturing returned to growth in November for the
first time in over a year. 
    Bonds' widened losses on news that Spain formally requested
the disbursement of 39.5 billion euros ($51.4 billion) of
European funds to recapitalize its banking sector.
    U.S. bond prices have moved in a tight range since the U.S.
presidential election nearly a month ago on the likelihood of a
contentious process between President Barack Obama and
Republican lawmakers to avoid the "fiscal cliff."
    The absence of a budget deal before year-end would cause a
fiscal contraction -- a series of automatic tax hikes and
spending cuts worth $600 billion -- austerity that could tip the
U.S. economy into a recession.
    U.S. business executives have cut spending and hiring on
possible fallout from a failure to reach agreement.
    Tepid growth and high unemployment will likely cause the
Federal Reserve to stick with its ultra-loose monetary policy. 
    The U.S. central bank is widely expected to decide at its
policy meeting next week that it will continue to buy
longer-dated government debt in 2013 in an effort to hold down
mortgage rates and other long-term borrowing costs to support
the economy. Its "Operation Twist" program, which involves
selling short-dated Treasuries and buying $45 billion a month in
longer-dated issues, will expire at the end of the month.
    St. Louis Fed President James Bullard told the Wall Street
Journal on Monday that the Fed could replace "Twist" with a
smaller $25 billion per month outright purchases in Treasuries.
    The Fed sold $7.828 billion in short-dated issues for
Operation Twist after buying $16.8 billion in long-dated debt
last week. 
    In November, Treasuries earned a middling 0.52 percent
return, lagging junk and municipal bonds, according to Barclays.

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