Long US bonds fall on stalled deficit talks

LONDON: Long-dated US Treasury debt prices fell and the cost of insuring the country's debt from default rose on Monday on investor concern that the world's biggest economy could lose its prized top-notch credit rating after debt talks collapsed.

Lawmakers have steadfastly refused to compromise, and talks once again collapsed at the weekend despite an Aug. 2 deadline by which they need to raise the debt ceiling to avoid defaulting on bill payments.

T-bill yields were little changed as investors still favoured the paper as a traditional safe haven, even as long-term bond yields jumped and were seen as the market's weak link if lawmakers are unable to agree on a broader deal to fix the country's deteriorating fiscal outlook.

Losses in short-term Treasuries were also limited as the nerves about the drama in Washington drove US stock futures down 0.75 percent.

Portfolio managers in Asia said they were on the sidelines waiting to see how a potential technical default or debt downgrade would impact markets given the huge role that Treasuries play.

The 30-year T-bond has see-sawed in recent sessions on the drawn-out talks, posting its biggest one-day fall last Tuesday on optimism that the Republicans and Democrats were close to breaking the deadlock before bouncing back on dashed hopes.

The 30-year T-bond price was last 20.5/32 down on the day to yield 4.297 percent, 3.8 basis points more than in late New York trade on Friday.

Five-year credit default swaps on US Treasuries rose four bps on the day to 57 bps, meaning it now costs $57,000 to insure an exposure to $10 million of US T-notes over five years.

"The risk is the rating agencies will move ahead of August to cut the rating... I'll just be a little bit wary because it does seem like the politics are becoming ridiculously tricky and Treasuries can trade weaker," a trader said.

Standard & Poor's said on Thursday it sees a real risk that future US government deficits may meaningfully miss discussed targets and that there is a 50-50 chance the US AAA credit rating could be cut within three months, perhaps as soon as next month.

NO COMMITMENTS

T-note futures slipped 1/32 to 124-9.5/32 in thin volumes with another trader saying investors were reluctant to commit to big positions given the uncertainty.

"No one has committed themselves either way, they don't want to get bearish or bullish either way," said Richard Carrick-Smith, a trader at Daiwa Europe in London.

"It's unbelievable they'd let it get this far. They're making a good mess of it."

One trader said this week's two-, five- and seven-year bond auctions could struggle to draw healthy demand if investors grow impatient about the prolonged negotiations.

Treasuries slightly underperformed German government debt, with the 10-year T-note yield premium over Bunds edging up to 18 bps from 16 bps at the European close on Friday. One trader said the scope for Treasuries to keep lagging Bunds was limited given the cloudy outlook for the US economy, keeping Treasuries well-bid.

Benchmark 10-year T-notes last yielded 2.982 percent, up 1.8 bps on the day while the two-year T-note yield was little changed at 0.395 percent.

Copyright Reuters, 2011