TREASURIES-Prices plunge as tax plan stokes US debt worries

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

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

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

* 10-year yields set for biggest daily gain since June ’09
(Adds buy side comment, updates prices)

By Chris Reese

NEW YORK, Dec 7 (BestGrowthStock) – U.S. Treasuries prices plunged
on Tuesday, with yields surging above key support levels, as a
proposed extension of tax cuts raised concerns over inflation
and the costs of the federal government’s massive debt burden.

Some analysts saw yields gaining further after Tuesday’s
price weakness, which marked the biggest selloff since June
2009. The lower prices spurred only average interest in an
auction of three-year Treasury notes, ahead of sales of
reopened 10-year notes Wednesday and 30-year bonds Thursday.

The selling pushed benchmark U.S. 10-year Treasury notes
yields to the highest since June. The 10-year yield touched
3.18 percent after breaking above its 200-day moving average of
3.10 percent and analysts anticipate it could probe support
near 3.20 percent and then 3.25 percent.

“The outlook for long-term rates and the yield curve has
become somewhat clearer now that the administration and the
presumptive Republican leadership on the Hill have come to
terms on a plan to extend the Bush-era tax cuts,” said Steven
Ricchiuto, chief economist at Mizuho Securities in New York.

“Specifically, the trading range on 10-year notes is now
expected to rise to 3 percent to 3.25 percent through early
next year, instead of the 2.75 percent to 3 percent we had
anticipated prior to the compromise being announced. A modest
uptick in the trading range on long-term rates reflects the
need for higher real yields in light of the fact that the plan
will be financed by increased borrowing,” he said.

Benchmark 10-year notes (US10YT=RR: ) traded 1-24/32 lower in
price to yield 3.14 percent, up from 2.93 percent late Monday.
Ten-year yields were on track for the biggest single-day rise
since June 2009.

The 30-year bond (US30YT=RR: ) traded 2-5/32 lower to yield
4.37 percent, up from 4.24 percent late Monday.

Investors moved 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 details see [ID:nN07288652].

“Investors are reacting to the political compromise on tax
cuts, to the potential of some uncertainty being lifted. It’s a
positive development for the U.S. economy so investors are
moving into riskier assets,” said Michael Cuggino, president of
Permanent Portfolio Funds in San Francisco, which has about
$9.5 billion of assets under management.

The tax move, intended 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 lost
tax receipts.

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

Indeed, ratings agencies also seemed to be pondering the
ramifications for U.S. debt costs, with Moody’s Investors
Service saying it was worried the tax cuts could become
permanent and Fitch Ratings saying the extension of the tax
cuts underscores the need for a “credible plan” to reduce
spending. [ID:nN07282425] [ID:nN07293531]

However, little impact was seen in the credit default swaps
market, where the cost of insuring U.S. government debt rose to
43 basis points, or $43,000 per year to insure $10 million in
debt for five years, from around 40.5 basis points Monday,
according to Markit Intraday.

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

The break-evens, or yield spread, between 10-year TIPS and
regular 10-year Treasuries grew to 2.28 percentage points, its
widest since May, according to Reuters data.

An auction of $32 billion of three-year notes brought a
yield that was slightly higher than expected, meaning buyers
were unwilling to pay the price demanded in the open market at
the time. The bid-to-cover ratio, a sign of demand, was 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.
(Additional reporting by Richard Leong; Editing by Kenneth
Barry)

TREASURIES-Prices plunge as tax plan stokes US debt worries