Bonds rally on worries over Greece bailout

NEW YORK (Reuters) - U.S. government debt prices jumped on Friday as demand for steeper fiscal cuts from Greece's creditors rekindled fears the nation might not clinch needed aid to avoid a messy default and spurred a flight to safe-haven bonds.

The pre-weekend scramble for Treasuries reversed the previous day's decline on optimism that Greece would soon receive a second bailout. That expectation pushed the 30-year bond yield to its highest levels since late October.

"It's all about Greek headlines now. Markets are facing another face-off and generally speaking, investors don't like being short Treasuries when these things are going on," said David Keeble, global head of interest rates strategy at Credit Agricole Corporate & Investment Bank in New York.

In the latest development on the Greek bailout negotiations, Jean-Claude Juncker, who chairs the Eurogroup, set three conditions for Greece to receive a second bailout worth 130 billion euros ($170 billion).

Juncker said the Greek parliament must ratify the package when it meets on Sunday and a further 325 million euros of spending reductions must be identified by Wednesday, after which euro zone finance ministers would meet again. Finally, Juncker said, the leaders of the coalition parties must give strong political assurances that the program will be implemented.

Facing elections as soon as April, Greece's party leaders have been loath to accept the lenders' tough conditions, which are certain to be unpopular with increasingly angry voters.

Markets have feared that without another round of aid, Greece would default on its debt, causing financial chaos akin to the global credit crisis triggered by the collapse of Lehman Brothers in 2008.

The protracted and often contentious talks between Greek and European leaders have fueled concerns about the long-term future of the euro zone and its monetary union, analysts say.

"The future seems to be almost unraveling as quickly as an elusive deal is coming together," said Robert Tipp, chief investment strategist at Prudential Fixed Income in Newark, New Jersey, which manages $327 billion.

Amid renewed worries about Greece, benchmark 10-year Treasury notes last traded up 18/32 in price with a yield of 1.97 percent, down 6 basis points from Thursday.

The 30-year bond auctioned on Thursday was up 1-9/32 points, yielding 3.13 percent, down nearly 7 basis points from Thursday's close.

The 10-year yield was on track to rise 5 basis points for the week and the 30-year yield was flat on the week.

The Treasury Department completed its $72 billion quarterly refunding this week, which was expected to raise $22.4 billion in fresh cash for the federal government.

In addition, the Federal Reserve bought $1.39 billion in Treasury Inflation-Protected Securities due in 2028 to 2041. They were the latest purchases for the U.S. central bank's $400 billion "Operation Twist" aimed to hold down long-term borrowing costs to help the economy.

U.S. data, which have generally come in stronger than expected in recent weeks, took a backseat to news on the Greek debt deal on Friday.

The government reported the U.S. trade deficit grew slightly more than expected in December at $48.80 billion, but the news did not move bonds.

U.S. consumer sentiment deteriorated in early February from a near one-year high in January on frustration about household finances despite the government reporting the jobless rate fell to a near three-year low in January, a survey from Thomson Reuters and the University of Michigan showed on Friday.

<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

Graphic on early February U.S. consumer confidence link.reuters.com/hur56s

Graphic on U.S. trade balance data: link.reuters.com/var56s

^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>

Still, analysts seem cautiously optimistic about the U.S. economy although signs of improvement since late 2011 have been overshadowed by the fiscal problems in the euro zone.

"We are confident that there is a grinding but improving situation in the U.S., but Europe would remain a significant risk to the market," said Stephen Wood, chief market strategist at Russell Investments in New York, which oversees $138 billion.