Bonds slip as Greece prospects damp safety bid

NEW YORK (Reuters) - U.S. Treasuries fell on Friday as positive comments from German officials about Greece winning an elusive rescue package encouraged selling of safe-haven U.S. government debt.

Prices of benchmark 10-year notes were down 9/32, their yields rising to 2.01 percent.

Ten-year yields above 2 percent have recently drawn buyers so traders had said losses in Treasuries could be limited, particularly before a three-day holiday weekend. The U.S. bond market will be shut on Monday for U.S. Presidents Day holiday.

"The primary reason for the moves is, once again, news from overseas," said Kevin Flanagan, executive director and fixed-income strategist at Morgan Stanley. "There's a growing sense Greece will ultimately get a deal and heading into the long weekend, shorts have been covered."

German Chancellor Angela Merkel, Italy's Mario Monti and caretaker Greek Prime Minister Lucas Papademos all expressed optimism over an accord during a three-way conference call, Monti's office said. German officials have been especially skeptical over previous Greek austerity proposals to bring its debt down.

Bailout funds will be disbursed only after a debt restructuring occurs. Greece needs the funds before March 20, when it must pay back debt worth 14.5 billion euros.

After falling on Thursday, partly on prospects for Greece, 30-year bonds were down 6/32, pushing their yields up to 3.15 percent.

Bonds trimmed losses as stocks edged up Friday after touching a nine-month high on Thursday. .N

In the euro zone debt market, riskier assets did better. Italian and Spanish sovereign debt yields dropped while safe-haven German government bonds came under pressure. Bund futures fell 62 ticks. <GVD/EUR>

With U.S. bond markets closed Monday when the European finance ministers are scheduled to meet, "people are selling in advance of that," said John Canavan, a market analyst at Stone & McCarthy Research Associates.

Some of the pressure on Treasuries also stemmed from dealers clearing inventory ahead of three debt auctions next week. The U.S. Treasury is scheduled to sell $35 billion in two-year notes on Tuesday, $35 billion in five-year notes on Wednesday and $29 billion in seven-year notes on Thursday.

That selling might be slightly more pronounced than usual because the note auctions begin on the first day of the holiday-shortened trading week. Normally, they begin on the second day.

The Treasury estimated $60.186 billion in coupon securities held by the public would mature on February 29.

Canavan said 30-year bonds and 10-year notes found bids near Thursday's lows.

"The key levels are 2.09 percent on the 10-year and the 3.18 percent level on the 30-year bond that had been the high yield since November 1 -- prior to last week," he said.

"A pullback in equities before the weekend, in conjunction with technical support, could provide Treasuries a slightly better bid this afternoon," Canavan said.

The government's report on January consumer prices arrived largely as expected, eliciting little reaction.

The Consumer Price Index rose 0.2 percent last month, which was just below forecasts for a 0.3 percent increase.

The 10-year breakeven rate, the gap between yields on 10-year TIPS and 10-year Treasuries, edged up just over 3 basis points from late Thursday to 2.27 percent, according to Tradeweb. It was the widest since August 11.

The 10-year TIPS yield was last bid at minus 0.244 percent, according to Tradeweb.

(Editing by Jeffrey Benkoe)