Bonds slip as U.S. deficit surges

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NEW YORK (Reuters) -- U.S. Treasury debt prices slipped Monday amid worries over a record large U.S. budget deficit, while higher stock priced eroded any safe-haven bid for government debt.

Equities strengthened after an upgrade of Goldman Sachs (GS, Fortune 500) Group and bullish comments from an influential analyst buoyed financial stocks.

"Higher stocks are hurting Treasurys," said Mary Ann Hurley, vice president of fixed-income trading for D.A. Davidson & Co in Seattle, adding bond prices were also undermined by worries over a massive and growing government deficit.

Bonds extended losses Monday after the Treasury Department said the U.S. government rang up a $94.32 billion budget deficit in June, which was a record for the month. Through the first nine months of fiscal 2009, the government had a $1.086 trillion deficit.

"People are concerned that the budget deficit is going to top $2 trillion in this fiscal year -- seeing all that red ink brings concerns about all of our deficit spending and the inflationary implications down the line," Hurley said.

Benchmark 10-year Treasury notes traded 14/32 lower in price for a yield of 3.36%, up from 3.31% late Friday.

Analysts said some investors expect upside surprises in bank corporate earnings reports this week, which would boost confidence in the banking system and damp demand for safe-haven U.S. government debt.

"The focus this week will be on the financials and it seems as if the bond market is building in the possibility of some upside earnings surprises out of the financial sector," said Derrick Wulf, portfolio manager at Dwight Asset Management Company in Burlington, Vermont.

Another challenge to bonds is that they have "rallied quite smartly" from lows in the early part of June and are "starting to appear somewhat exhausted," Wulf said.

Over the course of a month, 10-year Treasury note yields, which move opposite to prices, have fallen from 4% to nearly 3.25%.

And while worries over growing government deficits were hurting bond prices, losses were limited as investors took some solace in a two-week hiatus from new debt supply.

"The absence of new supply and some Fed purchases favor firm prices this week, but the bond market's drivers this week could be more related to earnings and equities," Wulf said.

The Fed will buy securities maturing May 31, 2011 to April 30, 2012 on Tuesday. On Thursday, the central bank will buy 20-year TIPS.

Two-year Treasury notes Monday traded unchanged in price for a yield of 0.92%, while the 30-year bond traded 23/32 lower for a yield of 4.24%, up from 4.20% late Friday.