TREASURIES-As investors embrace more risk, bonds fall

Tue Oct 11, 2011 10:56am EDT

Related Topics

* 10-year yield has support range of 2.20-2.35 pct - RBS

* 3-yr yields 20 bps higher than in Sept ahead of auction

* Euro zone EFSF votes drawing investors away from bonds

By Emily Flitter

NEW YORK, Oct 11 (Reuters) - U.S. Treasury prices fell on Tuesday, erasing gains that brought benchmark yields to historic lows last week, as investors' acute anxiety over Europe's debt crisis subsided.

Prices for the 30-year Treasury bond fell more than two points and the 10-year note fell a point in early trading.

Market participants on both sides of the Atlantic were encouraged by votes in 16 of the 17 euro zone member countries ratifying legislation to expand a stability fund for Greece and other struggling euro zone countries. The final vote is in Slovakia, and its finance minister, Ivan Miklos, said on Tuesday he sees the expansion of the European Financial Stability Facility being approved later this week.

But analysts warned the vote could actually halt, if only briefly, a rally in riskier assets such as stocks and commodities.

"Following the recent relief rally across asset classes, related to signals that European policymakers and politicians could tackle the erosion in the solvency of systemically relevant euro area banks more comprehensively and in a coordinated fashion, we would not be surprised to see some profit taking," wrote Barclays analysts in a note to clients.

Indeed, U.S. stocks recorded light gains on Tuesday, while Treasuries were catching up to the U.S. stock rally that occurred on Monday, when the Treasury market was closed.

"There's a timing mismatch," said Guy LeBas, chief fixed income strategist at Janney Montgomery Scott in Philadelphia.

"We have profit taking in the equity market yet Treasuries are adjusting for the new risk appetite in the market."

Without another bout of panic, however, Treasuries' direction seemed to be clear: higher yields, lower prices.

William O'Donnell, head of U.S. interest rate strategy at RBS Securities in Stamford, Connecticut, said he saw the 10-year yield nearing what he called "a solid support zone that we see extending from 2.20 percent up to 2.35 percent."

Benchmark 10-year notes traded a point lower in price to yield 2.18 percent, up from 2.07 percent late on Friday. The 10-year yield is nearly 40 basis points above a 60-year low it set more than two weeks ago.

There were no settlements on Monday, as the U.S. bond market was closed for the Columbus Day holiday.

Thirty-year bonds on Tuesday traded 2-1/32 points lower in price to yield 3.11 percent, up from 3.01 percent at Friday's close.

The three-year Treasury note fell 3/32 in price to yield 0.53 percent. The Treasury Department will auction $32 billion in three-year notes at 1 p.m. (1700 GMT).

The current three-year yield is nearly 20 basis points above the lowest-ever auction yield for three-year notes, which fixed at 0.334 percent on Sept 12.

Raymond Remy, a trader at Daiwa Securities in New York, predicted the auction would be "just absolutely great. It's cheap enough, it's gotten cheaper day after day after day," he said.

Demand, Remy added, would come from "the usual suspects ... It's real money accounts who need to move their duration out, and with the market getting cheaper in the front end they're going to take the opportunity to do so."

Also on Tuesday the U.S. Senate is set to vote after markets close on a bill that would penalize China for the peg of its currency to the dollar. While most analysts expect the bill to pass the Senate and die in the U.S. House of Representatives, its inflammatory potential may still affect the Treasury market, where China is a major player.

"The China story holds a quiet, underlying importance," Lebas said. "The long-run dangers of a trade dispute are significant enough to be worried about."

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