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Prices slip as US tax cut extended

Prices slip as US tax cut extended
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First Published: Sat, Dec 24 2011. 12 02 AM IST

Updated: Sat, Dec 24 2011. 12 02 AM IST
New York: US Treasuries slipped in thin trade Friday as Congress’s approval of a two-month payroll tax cut extension diminished the allure of safe-haven US government debt and aided riskier assets like stocks.
Dealers’ need to cut positions before year-end also weighed on Treasuries in thin, pre-holiday trade.
The US Congress approved a two-month payroll tax cut extension, interrupting partisan battling over taxes and spending. Unemployment benefits, which had been set to expire, were extended.
Many economists expect another year of subpar US growth in 2012, but the extension of a 4.2% 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% from 1.95% on Thursday. Thirty-year bonds fell 1-18/32, their yields increasing to 3.06% from 2.99% Thursday.
Major stock indexes rose more than 0.5% 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 14 Dec. 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 the US Federal 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% 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%. Economist polled by Reuters had expected a rise of 1%.
“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 00.30 am.
“Flows are zilch,” Ader said.
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First Published: Sat, Dec 24 2011. 12 02 AM IST
More Topics: Markets | US Treasuries | Bonds | Tax | Economy |