TREASURIES-Bonds sag as tax plan stokes inflation worries

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

* U.S. 10-year TIPS breakevens widest since May

* Two-to-30-year part of yield curve at record wide

* U.S. Treasury to sell $32 bln in three-year notes
(Recasts lead, updates market action, adds new quotes)

By Richard Leong

NEW YORK, Dec 7 (BestGrowthStock) – U.S. Treasury prices stumbled
on Tuesday as a proposed extension of tax cuts raised concerns
over inflation and 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. For more on U.S. tax compromise, see

“It’s going to stimulate the economy, and that’s going to
lead to more inflation,” said Justin Hoogendorn, fixed income
strategist at BMO Capital Markets in Chicago.

The tax move aimed at helping the economy has a hefty
price-tag. 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. “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 (US3YTWI=TWEB: ) would yield
0.79 percent, up 5 basis points from late on Monday.

The Treasury will announce the results of the three-year
auction shortly after 1 p.m. (1800 GMT).

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

Benchmark 10-year notes (US10YT=RR: ) shed 1 point in price
for a yield of 3.05 percent, holding at near-term chart support
and the highest yield since July.

Analysts estimate the 10-year yield would test support at
3.10 percent if the sell-off continues.

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

The yield spread between two-year and 30-year Treasuries
grew to a record wide of 3.87 percentage points.

The breakevens, or yield spread, between 10-year TIPS and
regular 10-year Treasuries grew to 2.27 percentage points, its
widest level since May, according to Reuters data.

Given the renewed risk appetite, Wall Street rallied with
the Standard & Poor’s 500 index (.SPX: ) touching its highest
level of the year above 1,227 points. Oil prices broke above
$90 a barrel to a two-year high, while gold reached a record
peak above $1,430 an ounce. See [.N] [O/R]
(Editing by Andrea Ricci)

TREASURIES-Bonds sag as tax plan stokes inflation worries