Bonds slide as Europe fears abate

NEW YORK Tue Oct 11, 2011 2:27pm EDT

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NEW YORK (Reuters) - Prices of U.S. Treasuries slid on Tuesday, pushing benchmark yields to their highest in more than a month, as fears about Europe's debt crisis receded after most euro zone countries voted to expand the region's bailout fund.

Thirty-year Treasury bonds fell more than two points in price and the 10-year note dropped a point.

Investors took comfort in the fact that votes in 16 of the 17 euro zone member countries approved legislation to expand a stability fund for Greece and other struggling euro zone countries.

The final vote is in Slovakia whose finance minister, Ivan Miklos, said he sees the expansion of the European Financial Stability Facility being approved later this week, although the approval is being held back by wrangling in the Slovak ruling coalition.

Most analysts, however, were confident that the Slovak vote on the euro zone rescue fund will go through.

"For now, the market thinks Europe is getting its act together. So we have seen a lot of selling pressure from that perception," said Kim Rupert, managing director of global fixed income analysis at Action Economics in San Francisco.

A three-year note auction totaling $32 billion drew solid demand, with the yield broadly in line with expectations and the 3.30 bid-to-cover ratio above the market average posted in the past 12 auctions for the same maturity.

Brian Dolan, chief strategist at Forex.com in Bedminster, New Jersey, said the three-year yield at the auction was a "reflection that rates have backed up a bit and that's in line with the rebound in risk sentiment and improvement in the U.S. economic outlook."

Without another bout of panic, however, Treasuries' direction seemed 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 to 2.35 percent."

In early afternoon trading, benchmark 10-year notes traded 27/32 lower to yield 2.17 percent, up from 2.07 percent late on Friday. The 10-year yield was about 50 basis points higher from a 60-year trough hit 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 2-8/32 points lower in price to yield 3.12 percent, up from 3.01 percent at Friday's close.

The three-year Treasury note fell 3/32 in price to yield 0.52 percent. The current three-year yield is roughly 20 basis points above the lowest-ever auction yield for three-year notes, which fixed at 0.334 percent on September 12.

The U.S. Senate is expected to pass legislation later on Tuesday designed to pressure China to let its currency rise in value against the dollar. Most analysts expect the bill to die in the U.S. House of Representatives, but the Treasury market could still be affected because of the legislation's inflammatory effect on China, which is a major market player.

"The China story holds a quiet, underlying importance," said Guy LeBas, chief fixed income strategist at Janney Montgomery Scott in Philadelphia. "The long-run dangers of a trade dispute are significant enough to be worried about."

(Editing by Kenneth Barry)

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