Bonds slump as tax plan, stocks rally cut bids

By Richard Leong

NEW YORK (BestGrowthStock) – U.S. Treasury prices sagged on Tuesday with benchmark yields rising above 3 percent, as a proposed extension of tax cuts raised concerns over the federal government’s ability to meet its long-term debt burden.

Bonds turned less appealing also for investors who view the tax deal between Democrats and Republicans as a fiscal stimulus for the economy, benefiting stocks, commodities and other risky assets, analysts said.

“This (raises a) question about fiscal sustainability,” said Keith Blackwell, interest rate strategist at RBC Capital Markets in New York. “This is not going to be a day that bonds would do exceptionally well.”

Adding to the downward pressure on the bond market was this week’s $66 billion in coupon-bearing supply, which kicks off with a $32 billon auction of fresh three-year notes.

In the “when-issued” market, traders anticipated the three-year Treasuries due Dec 2013 would yield 0.78 percent, up 4 basis points from late on Monday.

The Treasury will announce the results of the three-year auction shortly after 1 p.m..

The three-year note and other short-dated Treasuries were faring better than longer-dated maturities.

The yield spread between two-year and 30-year Treasuries grew to a record wide of 3.87 percentage point, suggesting bond investors’ worries over the impact of the proposed tax extension on long-term inflation and the federal deficit.

Benchmark 10-year notes shed 26/32 in price for a yield of 3.02 percent, within striking distance of 3.05 percent, its near-term chart support and the highest level since July.

Given the sell-off in the bond market, Wall Street is expected to open sharply higher. Oil prices broke above $90 a barrel to a two-year high, while gold reached a record peak above $1,430 an ounce.

(Reporting by Richard Leong, Editing by Chizu Nomiyama)

Bonds slump as tax plan, stocks rally cut bids