TREASURIES-Yields hit 3-week highs on euro zone recovery signs

Fri Jan 25, 2013 3:01pm EST

Related Topics

* Yields highest in three weeks on positive euro zone signs
    * Widely help long positions seen exacerbating selloff
    * Treasury to sell $99 bln new supply next week

    By Karen Brettell
    NEW YORK, Jan 25 (Reuters) - U.S. Treasuries yields surged
to their highest in three weeks on Friday after data showed
European banks are repaying more emergency loans than expected,
suggesting the region is healing and reducing demand for
safe-haven debt.
    The European Central Bank said that 278 banks will repay
137.2 billion euros ($183 billion) in 3-year loans next week,
out of 1 trillion euros that the ECB lent in twin operations in
December 2011 and February 2012. 
    The news sent German government debt rates higher and U.S.
government debt yields followed.
    "Banks returned more of the LTRO money than was expected, so
the 'risk on' move that we've seen for most of January has
accelerated," said Rick Klingman, managing director in
Treasuries trading at BNP Paribas in New York.
    The news pushed yields on U.S. two-year government notes
 below the yields on two-year German government debt
or Schatz for the first time in 13 months.
    Demand for Treasuries also ebbed after a survey showed that
German business morale improved for a third consecutive month in
January to its highest in more than half a year, indicating that
Europe's largest economy is gathering speed again.
 
    Benchmark 10-year notes fell 26/32 in price to
yield 1.95, the highest since Jan 4. The debt tested technical
resistance at yields of 1.80 percent on Thursday for the third
time this month, but failed to break below the level, which
added weakness to the market.
    "Given that, and the move to higher rates in Europe, we're
seeing some profit taking and people exiting long positions,"
said Klingman.
    Thirty-year bonds dropped 1-20/32 in price to
yield 3.14 percent, also the highest since Jan 4.
    Widely-held long positions by traders that are holding
Treasuries in anticipation of month-end extension buying may
have added to the move, as they needed to reduce or cover these
positions.
    "A lot of tactical guys are sitting long for month-end
extensions, with everyone on the long side you get an
exacerbated move," said Joseph Leary, a Treasuries trader at
Citigroup in New York.
    New supply scheduled for next week also weighed on the
bonds. The Treasury will sell $99 billion in new debt including
$35 billion in two-year notes on Monday, $35 billion in
five-year notes on Tuesday and $29 billion in seven-year notes
on Wednesday.
    "That's part of the reason we're trading heavy as well,
after a two week period of no supply we're returning to an
auction cycle again next week," said BNP's Klingman.
    Minutes from the Federal Reserve's January meeting will be
released next Wednesday and will be scrutinized for signs over
whether the central bank is likely to end its latest bond
purchase program this year.
    Minutes from the Fed's December meeting, released on Jan. 3,
showed that some Fed voting members opposed continuing bond
buybacks, sparking speculation that the central bank may end its
latest round of quantitative easing before year-end.
    "The FOMC could be a wild card, they will probably clarify
how easy they expect to be. The big move that you have to look
out for is the belly of the curve," said Citi's Leary.
    The Fed bought $3.71 billion in debt due in 2018 and 2019 on
Friday, out of $15.60 submitted for purchase on Friday as part
of this program.
    Investors are also focused on next Friday's payrolls
employment report for January, which is expected to show that
employers added 155,000 jobs in the month, according to the
median estimate of economists polled by Reuters.
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