While you were sleeping: Deficit worries hammer bonds

While you were sleeping: Deficit worries hammer bonds

December 9 (BusinessDesk) - U.S. Treasuries tanked as investors rethought the negative implications of President Barack Obama’s proposed tax package, namely that the American budget deficit was poised to widen even faster.

The renewed nervousness about the ability of the U.S. to meet its future debt obligations came ahead of the US$21 billion sale of 10-year notes today and a US$13 billion reopening of a 30-year bond issue tomorrow. In other words, the timing wasn’t ideal.

Yields on 10-year notes posted their biggest two-day jump since September 2008, rising 15 basis points to 3.27% by midmorning in New York, according to BGCantor Market Data.

Obama’s plan to extend the Bush-era tax-cuts is forecast to shore up U.S. economic growth by as much as 1 percentage point next year.

"This tax agreement is a disaster for the U.S. fiscal situation," Howard Simons, strategist at Bianco Research in Chicago, told Reuters.

The 10-year yield has climbed 35 basis points over two days, the most since September 19, 2008, when Treasuries fluctuated following the bankruptcy of Lehman Brothers Holdings Inc, according to Bloomberg News.

Stocks were mixed as investors weighed up the positive of an improved economy against the negative of rising corporate borrowing costs. The Dow Jones Industrial Average edged 0.02% lower. The Standard & Poor’s 500 Index was up 0.1% and the Nasdaq Composite Index advanced 0.23%

"I think rates would have to be a lot higher to impact corporations' bottom lines. But, at the same time, when the market sees rates going higher, that's certainly a negative for corporations on the whole," Thomas Villalta, portfolio manager for Jones Villalta Asset Management in Austin, Texas, told Reuters.

The Dollar Index, which tracks the currencies of six U.S. trading partners, rose to 80.087, climbing for a third day. The euro fell 0.1% to US$1.3243,

The outlook for U.S. stocks is upbeat, according to a Reuters poll of investors and strategists, which forecast steady economic improvement should fuel U.S. stock gains through 2011. International concerns could limit gains in the second half of the year, the poll showed.

Median forecasts from 50 respondents surveyed over the past week showed the Standard & Poor's 500 index rising to 1,285 by end of the first half of 2011, an improved outlook from a September survey, which had a target of 1,250.

"There are a number of powerful tailwinds supporting higher stock prices, including an accommodative Fed, a potentially more business and investor-friendly Washington, and a strong M&A cycle," Jonathan Golub, chief U.S. equity strategist at UBS, told Reuters.

The improved outlook is set to draw companies to the market.

American International Group Inc and the U.S. Treasury Department are planning a large stock offering for the first half of 2011 which could see the government cut its stake in the bailed-out insurer by as much as 20 percentage points, sources familiar with the matter told Reuters.

AIG and the Treasury would both sell stock in the offering, which could total more than US$10 billion. The insurer got a US$182.3 billion taxpayer-funded aid package during the financial crisis.

Across the Atlanctic, stocks gained. The Stoxx Europe 600 Index advanced 0.4% to 274.98, the highest since September 2008.

(BusinessDesk)

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