TREASURIES-Low-risk U.S. bonds weaken after strong Spanish sale

LONDON Thu Feb 7, 2013 6:34am EST

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LONDON Feb 7 (Reuters) - U.S. government bonds dipped in Europe on Thursday, after strong demand at a Spanish debt sale eased some of the concerns about political stability in Madrid, denting appetite for low-risk assets.

A widening corruption scandal involving officials of the ruling People's Party has led to calls for Prime Minister Mariano Rajoy to resign, raising worries that Spain may delay economic changes aimed at overcoming its debt crisis.

Spain sold more debt than planned and demand was similar to that seen at strong auctions in January, indicating investors, despite bidding a lower price for the bonds, were not ready to give up holding the high-yielding paper.

"The supply in Europe hit (German) Bunds and that triggered selling in Treasuries as well," one trader said.

U.S. 10-year T-note yields were last 2.9 basis points higher on the day at 1.9928 percent, while T-note futures were 7/32 lower at 131-25/64.

The trader said 10-year yields were developing a new trading range around 1.95-2.15 percent.

Some of the focus has switched to the European Central Bank meeting later in the day. The bank is expected to keep interest rates unchanged at 0.75 percent, but some in the market expect President Mario Draghi to soften its tone on monetary policy due to worries that a recent strengthening of the euro may hurt euro zone exporters and hamper chances of a full economic recovery.

Such a scenario may trigger a rebound in German Bunds and drag U.S. bonds with it because the two often move in tandem due to their safe haven status, traders said.

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