Prices fall on Greek bailout deal, new supply

NEW YORK Tue Feb 21, 2012 3:55pm EST

NEW YORK (Reuters) - U.S. Treasury prices fell on Tuesday after a long-awaited bailout deal for Greece dented appetite for safe-haven assets, but losses were moderated by concerns over Athens' implementation of stringent austerity measures.

The 30-year Treasury yield reached a technically significant level in upward trend, putting strategists on watch for a definitive break to higher yields in the long end of the Treasury curve in the coming days.

"Treasuries have been caught in the crossfire between new money trying to put on longs and people selling on the Greece news," said Gennadiy Goldberg, interest-rate strategist at 4Cast, Inc. In New York.

Goldberg said a yield of 3.19 percent on the 30-year bond represented a 23.6 percent retracement of the weekly measurement of the 30-year bond's rally from March 2011 to October 2011.

"If we establish a base on that level the next strong level on the weeklies would be around 3.38 percent or 3.50 percent, so it's a significant play at this point," he said.

Prices were also undermined as the Treasury Department began selling $99 billion of U.S. Treasuries this week, beginning with $35 billion of two-year notes on Tuesday afternoon. Investors often push to cheapen Treasuries going into such sales.

The Treasury's two-year note auction on Tuesday drew a high yield of 0.31 percent, the highest yield since July 2011. The sell-off in Treasuries deepened slightly afterward.

Two-year Treasury note yields also hit 0.31 percent in the open market, marking the highest since late October.

"Various factors have contributed to the backup, a notable one being very long dealer positions in the front end," said John Briggs, interest-rate strategist at RBS Securities in Stamford, Connecticut, in a note to clients after the auction.

The Treasury will auction $35 billion in five-year notes on Wednesday and $29 billion in seven-year notes on Thursday.

Bonds dipped after euro zone ministers reached agreement on measures to cut Greece's debt to just above 120 percent of economic output by 2020, signing off on the country's second rescue in less than two years and allowing it to meet a bond repayment next month.

"We believe the curve steepening will continue as markets digest the Greece news," said George Goncalves, head of U.S. rates strategy at Nomura Securities in New York, in a note to clients.

Benchmark 10-year notes were trading 13/32 lower in price to yield 2.05 percent, up from 2 percent late Friday, while 30-year bonds were 24/32 lower to yield 3.19 percent from 3.15 percent.

U.S. markets were closed on Monday for the Presidents Day holiday.

Shorter-dated Treasuries could come under more pressure this week. In addition to the Treasury's sale of $99 billion in new notes, the Federal Reserve will twice enter the market this week to sell shorter-dated notes.

The central bank on Tuesday sold $8.61 billion of Treasuries maturing December 2012 through May 2013. On Thursday the Fed is scheduled to sell $8 billion to $8.75 billion of Treasuries maturing April 2014 through February 2015.

The Fed sales are part of the U.S. central bank's latest stimulus program, dubbed "Operation Twist" under which it is selling shorter-dated securities and buying longer-dated bonds in an effort to lower longer-term borrowing costs.

"Supply will be a focal point this week, both here and in the euro zone," Action Economics said in a note to clients on Tuesday. "New York Fed Twist operations will be bearish on the surface, with two buybacks totaling between $3 billion and $4 billion, and two sales for between $16 billion and $17.5 billion."

(Additional reporting by Chris Reese; Editing by Chizu Nomiyama)