TREASURIES-Bonds off on tax plan; average demand in notes sale

* U.S. tax break plan raises inflation, payment concerns

* Lower prices fail to attract aggressive buying of 3-yrs

* Ten-year yield breaks 200-day moving average at 3.10 pct

* U.S. 10-year TIPS breakevens widest since May
(Adds strategist’s quotes, updates prices)

By Chris Reese

NEW YORK, Dec 7 (BestGrowthStock) – U.S. Treasuries fell on Tuesday
as a proposed extension of tax cuts raised concerns over price
inflation, although the drop in prices was not enough to
attract aggressive bidding in an auction of three-year notes.

Benchmark yields broke through key price support amid
worries the extension of the Bush-era tax cuts could increase
price pressures and contribute to a further expansion of the
U.S. budget deficit, possibly impairing the world’s largest
economy’s ability to meet its debt burden.

The auction of $32 billion of three-year notes brought a
slightly higher than expected yield, meaning buyers were
unwilling to pay the price demanded in the open market. The
bid-to-cover ratio, a sign of demand, was also the lowest since
February.

“With technical momentum negative and growth prospects
increasing due to the extension of the tax cuts, three-year
notes were unable to bring in quite enough buyers to clear
their 1:00 p.m. (EST) level,” said John Briggs, interest rate
strategist at RBS Securities in Stamford, Connecticut, who
typified demand in the auction as “generally average.”

The Treasury is set to sell $21 billion of reopened 10-year
notes on Wednesday, which could set the tone for even higher
yields, Briggs said.

“With 10 years up next, the signs remain for a further
concession in the market, especially with the important 3.06
percent technical support broken today in 10-year notes,”
Briggs said.

Following the three-year auction, benchmark 10-year notes
(US10YT=RR: ) were trading 1-22/32 lower in price to yield 3.12
percent, the highest yield since July and up from 2.93 percent
late Monday.

Apart from the 3.06 percent level, the 10-year yield was
trading above its 200-day moving average of 3.10 percent, a
negative chart sign. Analysts predict the 10-year yield would
eventually test next price support at 3.25 percent yields if
the bearish trend persists.

Investors flocked from bonds into stocks, commodities and
other risky assets on the view the tax deal between Democrats
and Republicans is a fiscal stimulus for the economy, analysts
said. For more on U.S. tax compromise, see [ID:N062113]

“Risk appetite is definitely improving. People are
definitely getting out of safer bonds into stocks and other
risky assets,” said Ryan Detrick, senior technical strategist
at Schaeffer’s Investment Research in Cincinnati, Ohio.

This intended tax move to help the economy has a hefty
price-tag that spooked bond investors. The Congressional Budget
Office estimated a two-year extension of tax cuts for all
Americans would cost the government about $500 billion in tax
receipts.

“This (raises a) question about fiscal sustainability,”
said Keith Blackwell, interest rate strategist at RBC Capital
Markets in New York.

Worries over inflation steepened the yield curve and fueled
bids for Treasury Inflation-Protected Securities (TIPS).

The breakevens, or yield spread, between 10-year TIPS and
regular 10-year Treasuries grew to 2.28 percentage points, its
widest level since May, according to Reuters data.
(Additional reporting by Richard Leong; Editing by Diane
Craft)

TREASURIES-Bonds off on tax plan; average demand in notes sale