Govt debt prices slip as risk appetite returns

NEW YORK: Most US Treasuries prices fell on Tuesday in choppy trading as investors tiptoed back into riskier assets and negotiations in Washington to cut the deficit and raise the debt ceiling looked enroute to disappointing bond investors.

Most Treasuries prices declined as stocks rose, though long bonds recovered from a dramatic selloff on Monday, as fears over the debt deal led longer maturities to underperform.

"The market has been under pressure this morning with equities doing a bit better," said Carl Lantz, interest rate strategist at Credit Suisse in New York.

The gap between two-year and 10-year notes, meanwhile, widened, in an indication that concerns over the deficit reduction and continuing disagreement over raising the debt ceiling are continuing to weigh on government debt.

Lawmakers in Washington are seeking spending cuts before agreeing to raise the debt ceiling, with only four days remaining before President Obama's deadline to reach a deal.

As the deadline nears, a "Plan B" introduced last week by Senate Republican leader Mitch McConnell, which will include fewer cuts than some had hoped, is seen as the most likely agreement to end the debt standoff.

"I think that at the end of the day (it) will leave the market somewhat underwhelmed,' said Lantz. "You'll have to deal with the fallout from raising people's expectations and then underdelivering, which I think for Treasuries means a bit higher yields and a bit steeper curve."

The plan could also pave the way for a rating downgrade from Standard & Poor's, which last week said it may cut the country's rating from the top AAA if there is no progress in reducing the country's deficit, regardless of an any agreement on raising the debt ceiling.

The cost of insuring US debt in the credit default swap market moved back to its recent highs, though the contracts continued to reflect a very low probability of a default.

Five-year protection costs, the most liquid contract, increased by 2 basis points to 56 basis points, or $56,000 per year for $10 million in debt, according to Markit.

Germany's CDS meanwhile jumped 4 basis points to 64 basis points, its highest level in two years, suggesting that investors see contagion from the euro zone as a larger concern than the potential problems posed by the US debt ceiling debate.

Copyright Reuters, 2011