TREASURIES-Prices jump after Germany bans naked shorts

Tue May 18, 2010 2:13pm EDT

Related Topics

* German government to prohibit some banks from shorting

* Bond prices climb as Wall Street turns lower

* Fresh euro weakness also fuels bonds

* 30-year viewed as cheap on the curve, draws buyers

* U.S. housing starts gained, but permits fell in April (Updates lead, price action, adds quote, changes byline)

By Emily Flitter

NEW YORK, May 18 (Reuters) - U.S. Treasuries prices rose on Tuesday, with the 30-year bond rising a full point, as Germany announced it would ban some short-selling activities and Wall Street stocks turned lower.

Treasury yields hit session lows after Germany's Finance Ministry announced a ban on naked short-selling at major banks. The ban would include a prohibition against naked shorting of euro government bonds. For more, click on [ID:nBAT005467]

Germany did not ban all short-selling of bonds, but by banning naked short-selling -- in which a position is taken on a bond without buying or borrowing the asset to support that position -- the government could make shorting more difficult because the supply of bonds to buy or borrow in such cases can become limited.

"If you can't sell a government bond short, then how is the market going to be deep and legitimate?" said Raymond Remy, head of U.S. fixed income at Daiwa Securities in New York. "I think that is bad for any market, but it just puts a little spook everywhere."

Worries about Europe's debt woes and the euro led some analysts to question the sustainability of the global economic recovery and the ability of the Federal Reserve to exit its strategy of keeping short-term interest rates near zero percemt.

U.S. stocks, which were higher earlier in the day, turned negative, with the major indexes down between 0.6 percent and 1.2 percent.

The 30-year bond US30YT=RR was up 1-8/32, its yield easing to 4.29 percent from 4.36 percent on Monday.

"The curve is rather steep and investors have their eye on the cheapest asset on the Treasury curve. It happens to be the 30-year," said Thomas di Galoma, head of fixed-income rates trading at Guggenheim Securities in New York. "The euro trading off was also a factor."

Early in the session, the government reported that U.S. housing starts reached a 1-1/2-year high in April, but a drop in permits -- which are viewed as a leading indicator -- to a six-month low suggested the housing recovery will remain slow.

Even as European finance ministers constructed details of a 750 billion euro, or nearly $1 trillion, stability package, uncertainty about financial stresses and the global economic outlook sustained an appetite for U.S. government debt.

Although recent U.S. economic data has been more upbeat, such as last week's retail sales report, those reports are being ignored as bond investors look to the future.

"The data down the road are expected to be much weaker as the double-dip forecasts for the second half of the year gain traction," said Chris Rupkey, chief financial economist at Bank of Tokyo/Mitsubishi UFJ in New York.

The benchmark 10-year note US10YT=RR rose 15/32, its yield, which moves inversely to price, easing to 3.43 percent from 3.49 percent late on Monday.

"Choppy trading is expected to continue with rates driven by the euro, equities and economic date which has been biased positive," said John Spinello, chief fixed-income technical strategist at Jefferies & Co in New York.

Two-year notes US2YT=RR were up 2/32 in price, yielding 0.77 percent.

Five-year notes US5YT=RR rose 11/32 in price, their yields easing to 2.13 percent from 2.21 percent on Monday.

Separately, prices paid by farms and factories dipped 0.1 percent last month following a 0.7 percent rise in March, the Labor Department said. That compared with market expectations for a 0.1 percent gain. (Additional reporting by Ellen Freilich; Editing by Leslie Adler)

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