Push higher in Europe, fiscal outlook limits gains

By Emelia Sithole-Matarise and Eric Burroughs

LONDON/TOKYO (BestGrowthStock) – U.S. Treasuries rose in Europe on Friday, with some investors viewing yields at six-month peaks as alluring and markets calmer after a strong auction of 30-year debt the previous day.

The $13 billion sale drew strong foreign demand and showed some market players were ready to tip-toe back in after the rout earlier this week, which was initially sparked by a surprise U.S. political compromise to extend and broaden tax cuts.

Treasury yields, however, were unlikely to fall further owing to increasing concern about the measures’ potential impact on the U.S. budget deficit and inflation, rate strategists said.

The 30-year T-bond outperformed, rising 20/32 in price to yield 4.366 percent, down about 4 basis points from late U.S. trade.

The benchmark 10-year T-note was up 2/32 in price to yield 3.206 percent, 1 basis point lower on the day and off a six-month high of 3.330 percent reached on Wednesday. For the week, yields were up 16 basis points.

“If we see yields easily go back to 3 percent in one go then probably if you have a short position you should reconsider changing it. But to go below 3 percent again quickly it needs really horrible economic data,” said Bettina Mueller, a fund manager at DWS Investment.

Mueller said yields were likely to stabilize or edge higher next week with upcoming economic data seen broadly upbeat and the Senate expected to vote on Monday on President Barack Obama’s plan to extend the tax breaks.

“People probably recognize that the new fiscal package… will increase the deficit so are getting aware that in the U.S. there are difficulties as well as in Europe,” she said.

“Definitely (Treasury yields of) 2.50 and 2.75 percent is too low for such a high budget deficit and probably for a central bank that’s faced with strong criticism and people think(ing) they are financing the budget deficit.”

ALL ABOUT GDP

President Obama’s compromise on the Bush-era tax cuts included a payroll tax and renewed jobless benefits, leading economists to revise up growth forecasts for 2011, based on the extra stimulus the package provides, even while fretting about the additional debt burden imposed by the deal.

PIMCO, the world’s biggest bond fund whose top portfolio managers have been pessimistic about the U.S. recovery, has also revised up its economic forecast for growth to a 3.0 percent to 3.5 percent pace by the end of next year.

“We have to recognize the small signs of traction in the economy,” said Bernie Ward, head of non-yen sales and trading at RBS in Tokyo.

However, he added, some investors, such as Asia-based portfolio and reserve managers, had been spooked by this week’s volatility and may sit on the sidelines through year-end.

“Real money is not yet ready to buy until we see some stability,” he said.

Both Treasury debt futures and 10-year yields shot through the 200-day moving average and 50 percent retracement of the markets steady gains between April and October that drove 10-year yields as low as 2.334 percent.

Push higher in Europe, fiscal outlook limits gains