TREASURIES-U.S. 10-yr yields at 10-month high on supply jitters

LONDON Thu Feb 14, 2013 5:40am EST

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LONDON Feb 14 (Reuters) - U.S. 10-year Treasury note yields rose to a 10-month high on Thursday before an auction of 30-year bonds after tepid demand at a 10-year note sale the previous day triggered concern about a fund shift into riskier assets.

Treasuries underperformed German Bunds, with their 10-year yield spread widening by three basis points to 39 bps, the widest since early January with Bunds boosted by data showing the euro zone slipped deeper than expected into recession in the last quarter of 2012.

On Wednesday, the Treasury sold $24 billion in 10-year notes at a high yield of 2.046 percent, above what the market had expected.

The yield on the new notes rose as high as 2.063 percent in European trade, the highest for the current 10-year notes since April last year, rising above the Feb. 4 high of 2.0590 percent. It was last at 2.05 percent, up 1.8 basis points from late New York levels.

"Even though retail sales came in softer it didn't necessarily help which tells me the market is pushing for higher yields and the driver remains supply," a trader said.

"We still have to take down $16 billion of 30-year duration that's going to have a big impact."

Treasury yields could make a clear break above their recent trading ranges if the sale of 30-year bonds later in the day also fails to attract strong demand. The 30-year yield stood at 3.243 percent, near a 10-month high of 3.254 percent hit last week.

"The (10-year) auction came close to the 2.06-ish level and the market is now looking to target close to the 2.09 (percent) level and it's more a question of how quickly we get there," the trader said.

The rise in yields came even after data showed on Wednesday U.S. retail sales barely rose in January as tax increases and higher gasoline prices restrained spending.

Many investors expect global growth to gain momentum this year as the euro zone shows some sign of stability while the Chinese economy rebounds, reducing the attraction of bonds.

Investors are now focused on a package of automatic spending cuts, which are due to kick in on March 1 unless lawmakers agree on alternative budget measures or delay negotiations to a later date.

While concerns about spending cuts could prop up Treasuries for now, some traders are of the view the market may have already priced in these cuts to some degree.

Senate Republican leader Mitch McConnell said on Tuesday he expects across-the-board cuts, known as a sequester, to begin on schedule.

"It is clear now that the U.S. sequester will start biting ever harder over the coming weeks and maybe months. A modest initial hit is probably already priced," Societe Generale strategists said in a note.

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