TREASURIES-Selling continues in Treasuries as 10yr sale nears

Wed Oct 12, 2011 10:52am EDT

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By Emily Flitter

NEW YORK, Oct 12 (Reuters) - Treasury prices fell on Wednesday as global stocks rallied on hopes that Europe's financial crisis could soon be contained, while traders sold off Treasuries in preparation for a $21 billion auction of 10-year notes.

The 30-year Treasury bond saw the heaviest selling, losing nearly two points in price. Yields on 10-year notes hit highs last seen Sept 1, while 30-year yields returned to highs last seen Sept. 21.

Strong optimism appeared among market participants that European leaders would move to recapitalize struggling euro zone banks and would also succeed in expanding the European Financial Stability Fund. Slovakia is the only one of the 17 euro zone countries that must still approve the expansion of the EFSF, in a vote that could come as early as Thursday.

"The selloff is basically on the back of hopes and prayers that Europe gets its act together," said Scott Graham, head of Treasury trading at BMO Capital Markets in Chicago.

"I'm a little bit surprised that the market's not reacting more to the Obama jobs bill getting canned and some of the tough talk on currency issues," he added, referring to bills in the U.S. Congress that saw voting this week.

On Tuesday night, a bill introduced by President Barack Obama that would put $447 billion toward job creation failed to get enough votes for consideration in the Senate. Earlier this week, the Senate passed a bill designed to penalize China for pegging its currency to the dollar.

"Both of those things should be bullish for Treasuries," Graham said.

George Goncalves, head of U.S. rates strategy at Nomura Securities in New York, said higher hopes for Europe and better U.S. economic data have "led to an overall risk-positive theme for US markets."

That atmosphere was fueling selling in the Treasury market.

"We look for consolidation in the near term," Goncalves wrote in a note to clients.

William O'Donnell, head of U.S. rates strategy at RBS Securities in Stamford, Connecticut, said in a note to clients he saw several technical indicators for continued selling in Treasuries, especially in longer-dated securities. He pointed to bearish weekly momentum in 10s and 30s, and a break above the bull rate trendline on Tuesday by the 30-year yield.

"Long term Treasuries are at serious risk of surprising the crowd (me too) with the magnitude of ongoing back-up," O'Donnell wrote.

That sentiment could create some confusion around Wednesday's auction. The Treasury Department will sell $21 billion in reopened 10-year notes at 1 p.m. (1700 GMT).

While selling ahead of an auction usually bodes well for demand at the auction, a widespread belief that yields are still too low could cause potential bidders to hang back.

Last month's 10-year auction drew the lowest yield ever, at 2 percent. Wednesday morning's trading brought 10-year yields to 2.21 percent, more the 20 basis points higher. Ten-year notes were last off 17/32 in price.

The 30-year bond was down 1-28/32 in price and yielding 3.19 percent, up from 3.10 percent at Tuesday's close.

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