February 12, 2013 / 8:21 PM / 5 years ago

TREASURIES-Prices off before retail data; G7 remarks spark short covers

* Prices fall after first of $72 billion new debt sales
    * G7 comments spark bout of short covering
    * Spending cuts due in March may increase demand for bonds
    * Barclays sees 10-year yields falling to 1.80 percent

    By Karen Brettell and Luciana Lopez
    NEW YORK, Feb 12 (Reuters) - Prices for U.S. Treasuries fell
on Tuesday as investors looked ahead to retail sales data to
shed light on consumer habits on Wednesday after a lackluster
debt sale, the first for a total of $72 billion in supply this
    The Treasury sold $32 billion in three-year notes on
Tuesday, its first sale of coupon debt this week.
    "It was pretty weak given how cheap the three-year was in
our view," said Jim Vogel, interest rate strategist at FTN
Financial in Memphis.
    Instead, investors are looking to retail sales data for
January, due on Wednesday, he said. Investors will be looking
for signs that a bump in payroll taxes is prodding people to
hold onto more of their paychecks.
    "I think a lot of people are primed not necessarily to think
about the 10-year auction until we get through retail sales
tomorrow," Vogel said.
    The Treasury will sell $24 billion in 10-year notes on
Wednesday and $16 billion in 30-year bonds on Thursday. 
    Earlier in the session comments from an official with the
Group of Seven that it is worried about excess moves in the
Japanese currency sparked a round of short covering.
    Investors interpreted the new comments from the G7 official
as meaning that the group did not support moves in the Japanese
yen, as was thought after the G7 said in an official statement
that it is committed to "market-determined" exchange rates.
    It "prompted a bout of short covering in Treasuries," said
Dan Mulholland, managing director in Treasuries trading at BNY
Mellon in New York.
    Benchmark 10-year notes were last down 5/32 in
price to yield 1.982 percent.
    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.
    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. 
    In addition, the Federal Reserve bought $3.31 billion in
debt due 2020-22 on Tuesday as part of its ongoing bond purchase
program meant to stimulate the economy.
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