TREASURIES-US Treasuries sell-off could be start of bear trend

Wed Jun 29, 2011 11:36am EDT

Related Topics

* Yields head toward support levels, signal more selling

* Greece approves austerity plan, second vote on Thursday

* Traders begin setup for $29 bln 7-year note auction (Adds quote, technical info, changes headline, updates prices)

By Emily Flitter

NEW YORK, June 29 (Reuters) - Treasury prices stretched a sell-off into a third day on Wednesday as Greece's parliament took the first of two steps toward adopting austerity measures that would qualify the country for international aid and help it avoid a default.

Analysts said the price action in Treasuries could signal a broader move toward higher rates, unless something went drastically wrong in Greece.

The Greek parliament approved a five-year package of spending cuts, tax rises and state asset sales by a comfortable margin in a key step toward securing international funds and preventing the euro zone's first sovereign default. Another "Yes" vote on Thursday will clear the deal. For details, see [ID:nL6E7HT0PS]

"It's really all Greece this morning," said Gennadiy Goldberg, fixed income analyst at 4CAST, Inc in New York. "Everyone's really optimistic that the austerity measures will pass."

As confidence in the markets grew, investors shifted more and more of their money out of safe-haven bonds and into higher-yielding assets such as stocks and commodities.

"It has provided more of a risk-on type of trade," said Kim Rupert, managing director of global fixed income analysis at Action Economics in San Francisco.

"We have seen equities make some pretty decent gains and bond yields rise. Risk aversion has diminished."

Treasury yields were rising through key support levels, with the 10-year yield US10YT=RR on its way to the top of its 50-day moving average at 3.11 percent.

"Once we break the 200-day moving average at 3.14 percent, that would signal the start of a bigger correction," Goldberg said.

William O'Donnell, head of Treasury strategy at RBS Securities in Stamford, Connecticut, said a bearish trend could be in place by Friday's close that could take the 10-year yield to 3.25 percent or even 3.40 percent.

But Goldberg said success for the austerity measures was not certain, and neither was Treasuries' march toward higher yields.

"The market's getting extremely optimistic, but if the Greek vote is 'No,' all we've seen in the past three days may be reversed in one giant move," he said.

Benchmark 10-year Treasury notes were trading 12/32 lower in price and yielding 3.08 percent, up from 3.04 percent at Tuesday's close. The 30-year Treasury bond US30YT=RR slipped 1/32 in price for a yield of 4.33 percent, unchanged from late on Tuesday.

Traders were also setting up for a $29 billion auction of seven-year notes set for 1 p.m. (1700 GMT). It was the third of three auctions this week, with new coupon issuance totaling $99 billion.

The Treasury's $35 billion auctions of two-year notes and five-year notes on Monday and Tuesday surprised market participants with weaker-than-expected statistics. Bidders in those auctions demanded lower prices and higher yields, and there were fewer bids overall than in the recent past.

An auction of five-year German bunds on Wednesday also drew surprisingly weak demand.

"Nothing today that we've seen has surprised us except for some mild surprise that the five-year bund auction didn't cover," said RBS' O'Donnell.

"When people started to think of the fact, 'Oh my gosh, we had a bad two-year auction, a bad five-year auction, and now a bad German five-year auction,' people are starting to think 'Oh my gosh, the appetite for risk-less assets is fading.'"

George Goncalves, head of U.S. rates strategy at Nomura Securities in New York, wrote in a note to clients: "The seven-year auction is likely to be better received than the five-year was on Tuesday as the current position on the curve allows it better demand than the fives, in our view.

"Sevens also benefit from large real money buyers who are drawn to extend from fives with the incentive of more stable auctions and a pickup for a small extension up the curve."

Seven-year notes US7YT=RR were down 8/32 and yielding 2.35 percent, up from 2.31 percent late on Tuesday. The last time the Treasury Department auctioned seven-year notes, their auction high yield was also 2.38 percent. (Additional reporting by Chris Reese; Editing by Dan Grebler)

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