Bonds dip as debt ceiling worries mount

TOKYO: US Treasuries dipped in Asian trade on Tuesday as a deadlock in Washington over the debt ceiling showed no sign of easing, raising worries that a credit downgrade on US debt is increasingly likely.

Ten-year notes fell 8/32 in price to yield 3.04 percent, compared with 3.00 percent in late US trade.

President Barack Obama, in a televised address aimed at rallying public support for a package proposed by Democrats, warned that failure to increase the US borrowing limit would severely hurt the nation.

But his speech gave no sign of whether Democrats and Republicans are making progress to seal an agreement before the Aug. 2 deadline, when the US Treasury said it will run out of money.

"It looks like there is a serious ideological confrontation, making us wonder whether compromise is possible," said a trader at a Japanese bank.

House Speaker John Boehner, the top Republican in Congress, advanced a two-stage deficit reduction plan that would start with an initial $1.2 trillion in savings over 10 years, placating demand from Tea Party conservatives who do not want any tax hike to be included in the deal.

On the other hand, Democrats formally presented their competing plan for $2.7 trillion in deficit reduction over the next decade, which Boehner dismissed as "full of gimmicks."

* None of these plans may be enough to avoid a downgrade as rating agency S&P has warned it could downgrade the United States unless lawmakers agree on steps to reduce the deficit by $4 trillion over 10 years.

Still, market players think a default will be avoided and there is no sign of panic, with implied volatility on Treasury futures still at a historically subdued level.

Analysts said macro hedge funds and others were reluctant to trade, having struggled with choppy markets all year, and cut back on positions heading into the European summit on Greece last week.

"It has been a tough year for macro funds, and many do not want to trade Washington headlines," said Alan Ruskin, macro strategist at Deustche Bank in New York.

Copyright Reuters, 2011