GLOBAL MARKETS-US bond yields surge, stocks erase gains

* U.S. Treasury prices drop on fiscal fears

* Insider trading probe also dents equity rally

* Euro falls to session low on euro zone debt woes
(Updates lead with interest rate context)

By Manuela Badawy

NEW YORK, Dec 7 (BestGrowthStock) – U.S. government bond prices
fell sharply on Tuesday amid worries over the fiscal outlook,
while Wall Street stocks ended up only slightly on concern
about the impact of higher long-term rates.

The euro was mostly weaker as Ireland’s parliament debated
a tough austerity budget, reminding investors of the euro
zone’s indebtedness, while the U.S. dollar benefited from
rising Treasury yields.

Investors bailed out of U.S. Treasuries after President
Obama proposed a deal on tax cuts and unemployment payments
that would boost economic growth in the short term but raise
debt levels longer term.

Moody’s Investors Service said U.S. finances could suffer
in the long run, though it did not foresee a change to the
country’s AAA credit rating in the next 18 months to two
years.[ID:nN07283861]

“This reduces revenue on top of extending jobless benefits,
which is bad for deficits. In the short run this is good news,
but two to three years down the road foreign buyers of U.S.
Treasuries may start to balk,” said David Carter, chief
investment officer at Lenox Advisors in New York.

Rising U.S. bond yields spooked the stock market with
investors worried that higher borrowing costs could hurt
corporate profits and consumer spending.

“The spike in interest rates could be enough to stop the
equity rally in its tracks,” said Peter Boockvar, equity
strategist at Miller Tabak & Co in New York.

Stocks in Europe and America initially gained in reaction
to President Obama’s proposed tax plan which is seen boosting
U.S. economic growth and lowering unemployment. Concern about
rising U.S. bond yields and a widening probe by regulators into
insider trading saw stocks lose early gains and end little
changed in New York though.

News late in the trading day that federal authorities have
ramped up an investigation into insider trading on Wall Street
fueled selling in the equities market. [ID:nN07296421]

The Dow Jones industrial average ended (.DJI: ) down 3.64
points, or 0.03 percent, at 11,358.55, with the Standard &
Poor’s 500 Index (.SPX: ) up just 0.68 points, or 0.06 percent,
at 1,223.80. The Nasdaq Composite Index (.IXIC: ) was up 3.57
points, or 0.14 percent, at 2,598.49.

The benchmark 10-year U.S. Treasury note (US10YT=RR: ) saw
its biggest one-day sell off since June, with the yield rising
to 3.14 percent. The 2-year U.S. Treasury note (US2YT=RR: ) was
down 7/32, with the yield at 0.5318 percent. The 30-year U.S.
Treasury bond (US30YT=RR: ) was down 70/32, with the yield at
4.3703 percent.

The Obama tax plan would cost $501 billion in lost tax
revenues, according to the non-partisan Congressional Budget
Office, at a time when investors are increasingly concerned
about U.S. budget deficits that have approached 10 percent of
economic output in recent years.

The bond sell-off intensified after a disappointing
three-year debt auction and fears over its impact on bidding at
subsequent sales of 10-year and 30-year debt later this week,
they said.

The U.S. dollar rose the most against the yen in nearly
three months on Tuesday after the proposed extension of U.S.
tax cuts triggered higher Treasury yields, though the
longer-term impact on the greenback is less clear given an
already large U.S. deficit. The greenback rose 1 percent to
83.50 yen (JPY=EBS: ).

The euro fell (Read more about the trembling euro. ) versus the U.S. dollar (EUR=EBS: ), slipping
0.3 percent at $1.3262, and analysts expect the euro zone
single currency to remain under pressure and slide below $1.30
in coming weeks as fears about the euro zone’s debt problems
persist.
(Reporting by Manuela Badawy; Editing by Kenneth Barry)

GLOBAL MARKETS-US bond yields surge, stocks erase gains