February 15, 2013 / 8:16 PM / in 5 years

TREASURIES-Bond yields rise as consumer sentiment improves

* Budget talks could be focal point, may send yields lower
    * Treasury to sell $9 bln 30-year TIPS next week

    By Karen Brettell and Luciana Lopez
    NEW YORK, Feb 15 (Reuters) - U.S. Treasuries prices fell on
Friday after data showed a brighter outlook from U.S. consumers,
though yields held under key support levels at 10-month highs.
    Bonds could see a bid in coming weeks as budget talks in
Washington dominate trading and bring fiscal policy into focus.
    The Thomson Reuters/University of Michigan's consumer
sentiment index rose to 76.3 from 73.8 in January, topping
economists' forecasts of 74.8.
    "The number was stronger than expected and consistent with a
U.S. economy that continues to grow," said Eric Stein, portfolio
manager at Eaton Vance in Boston. That said, "the recovery is
not booming by any stretch of the imagination."
    Benchmark 10-year notes were last down 4/32 in price to
yield 2.010 percent. 
    The notes have tested support at yields of around 2.03
percent to 2.06 percent over the past few days but failed to
break higher, which could set them up for further weakness.
    The next milestone for the market will be negotiations in
Washington over the automatic budget cuts that are scheduled to
come into effect on March 1. If the cuts do come to fruition,
they could drag on the economy.
    Even so, Jim Sarni, managing principal of Payden & Rygel,
expects there will be a resolution to the budget cuts, much like
last year's fiscal cliff fears, which fell by the wayside when
policymakers came to an 11th hour deal.
    "I think we will muddle through those just as we did the
fiscal cliff," he said.     
    A new $9 billion sale of 30-year Treasury
inflation-protected sSecurities (TIPS) next Thursday will also
be closely watched, after months of strong demand for
inflation-linked bonds.
    The auction risks being weak because the debt is offering a
record low coupon of around 0.58 percent, based on Friday's
levels, and as consumer price data will be released earlier the
same day.
    "CPI coming the same day as the auction adds one more
element of uncertainty to the TIPS set up. I think it will make
it harder," said Aaron Kohli, an interest rate strategist at BNP
Paribas in New York.
    Investors wanting to roll existing holdings into the new
issues may also choose to wait for larger auctions of the bonds
in the coming months, Kohli said. 
    Markets also were focused on a meeting in Moscow of
financial officials from the Group of 20 nations on Friday that
is expected to be dominated by the debate over exchange rates.
    At issue is whether the loose monetary and fiscal policies
of the United States, Japan, Britain and the euro zone amount to
strategies of "competitive devaluation" or currency
manipulations intended to boost exports and growth.
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