TREASURIES-10-yr yield rises above 50 pct retracement

* Treasuries fall as tax cuts boost growth outlook

* Bond vigilantes also wary of rising deficit

* Traders look to 10-year auction later on Wednesday

By Hideyuki Sano

TOKYO, Dec 8 (BestGrowthStock) – U.S. Treasury prices fell sharply
for a second day on Wednesday, with the 10-year yield possibly
heading to 3.40 percent this week after a proposed extension of
tax cuts brightened the outlook for U.S. growth but raised fears
of fiscal deterioration.

The tax cuts would probably further swell the U.S. budget
deficit, prompting investors to seek a larger premium for holding
U.S. Treasury debt at a time when investors watching the euro
zone crisis are growing nervous about rising sovereign debt.

“The tax cuts have changed the market’s landscape. A lot of
people are now changing their scenarios. Many economists are
saying the tax cuts will push up U.S. growth by 0.5 to 1.0
percentage point,” said Arihiro Nagata, fixed income manager at
Sumitomo Mitsui Banking Corp.

The 10-year U.S. Treasury yield rose more than 10 basis
points in Asia to 3.25 percent (US10YT=RR: ), a level not seen
since late June and beyond Tuesday’s high of 3.18 percent. The
yield has risen more than 40 basis points so far this month.

“After such a sharp rise in yields, you would expect some
bargain-hunting from investors. But today there are just no
buyers,” Nagata added.

The market is at a critical juncture, as a 10-year yield of
3.17 percent represents a 50 percent retracement of the
April-October fall to 2.33 percent from 4.01 percent.

“The big question is whether the yield will come back below
the 50 percent retracement level by the end of the day. If not,
we may be in for more of a sell-off,” a fund manager at a U.S.
asset management firm said.


If the 50 percent retracement is clearly broken, some market
players may look to 3.37 percent, a 61.8 percent retracement, as
a next target.

A rise to that level would hardly be out of sync with the
economic outlook, given that many economists are now expecting
the U.S. economy to grow more than 3.0 percent next year, traders

The yield could rise further later in the day as traders
prepare for an auction of $21 billion of 10-year Treasuries. That
will be followed by a $13 billion offering of 30-year notes on

A proprietary trader at a Japanese bank said December
auctions of 10-year T-notes have drawn tepid demand in three of
the last four years, as investor interest wanes ahead of the
year-end holidays. The only exception was December 2008, when the
United States was gripped by the financial crisis.

“December tends to be a bad month for Treasuries. Last year
the 10-year yield shot up 60 basis points. So the auctions looked
tough even without those tax cuts. Now many investors will
probably want to wait,” the trader said.

President Barack Obama on Monday unveiled a compromise deal
to extend all Bush-era tax cuts for two years, prompting
investors to move from bonds into stocks, commodities and other
risky assets on the view that the tax deal would stimulate the

The deal, which also calls for a 2 percent employee payroll
tax cut and a 13-month extension of unemployment benefits, was
larger than many market players had expected.

But the tax move is expected to have a hefty price tag. The
non-partisan Congressional Budget Office estimated the plan would
cost the government about $500 billion in lost tax receipts at a
time when Obama is under pressure to cut the $1.3 trillion budget
(Additional reporting by Masayuki Kitano in Singapore and Saikat
Chatterjee in Hong Kong ; editing by Edmund Klamann)

TREASURIES-10-yr yield rises above 50 pct retracement