Prices slip as US tax cut extended

Dealers' need to cut positions before year-end also weighed on Treasuries in thin, pre-holiday trade.

Many economists expect another year of subpar US growth in 2012, but the extension of a 4.2 percent payroll tax rate, which would otherwise have risen for 160 million American workers in the new year, at least postponed that potential restraint on US economic growth.

"A massive swing in fiscal policy which could have reduced first-quarter 2012 GDP growth by one to two percentage points has been averted," said Cary Leahey, managing director and senior economist at Decision Economics in New York.

The Congressional approval favored riskier assets like stocks and hurt a safe-haven refuge like US government debt.

Benchmark 10-year Treasury notes fell 21/32, their yields rising to 2.02 percent from 1.95 percent on Thursday. Thirty-year bonds fell 1-18/32, their yields increasing to 3.06 percent from 2.99 percent Thursday.

Major stock indexes rose more than 0.5 percent at midday.

"At the top of the list of reasons for Treasuries being down is Congress agreed to extend the payroll tax cut, removing some fiscal uncertainty," said Kevin Flanagan, managing director and chief fixed-income strategist at Morgan Stanley Smith Barney.

Traders lightened positions before year-end, also weighing on prices.

"Record dealer coupon positions (were recorded) as of Dec. 14. There's a need to get lighter before year-end," said Ward McCarthy, managing director and chief financial economist, fixed-income, at Jefferies & Co in New York.

Dealers also shed supply after the US Treasury sold three-, 10- and 30-year securities last week and two-, five- and seven-year debt this week.

"There's some indigestion after last week's auctions and this week's auctions," Flanagan said.

Talk that theFederal Reserve could signal it would keep short-term interest rates near zero through 2014 or beyond to support the economic recovery also supported riskier assets.

A batch of government economic data released Friday was essentially tepid, economists said.

US personal income rose 0.1 percent last month, less than economists had forecast. Personal spending was also subdued.

The headline figure for durable goods orders was strong, while the closely watched category of orders for non-defense related durable goods, excluding aircraft -- a figure viewed as a proxy for business spending -- fell 1.2 percent. Economist polled by Reuters had expected a rise of 1 percent.

"The drop in the core components, capital goods orders and shipments non-defense ex-aircraft suggested a softer tone to capital expenditures," said David Ader, head government bond strategist at CRT Capital in Stamford, Connecticut.

Sales of new homes rose in November, but the number of transactions was still subdued.

"New homes, like single family housing starts, have effectively flat-lined since plunging from (a seasonally adjusted annualized rate of) 414,000 in April 2010 to 281,000 in May 2010," McCarthy said.

Traders noted low volumes in a pre-holiday, abbreviated trading session. The bond market will close early at 2 p.m. EST (1900 GMT).

"Flows are zilch," Ader said.

Copyright Reuters, 2011