TREASURIES-10-year yields tumble to lowest in six months in heavy volume

Thu May 15, 2014 2:51pm EDT

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(Updates prices)
    * 10-year note yields lowest since Oct, 30-year lowest since
June
    * U.S. economic data overall solid, Greek bond yields rise
    * Speculative short-covering seen sending yields lower

    By Karen Brettell
    NEW YORK, May 15 (Reuters) - Benchmark U.S. Treasuries
yields fell to six-month lows on Thursday in heavy volume after
Greek government bonds weakened  and sparked safety buying of
U.S. debt, even though U.S. economic data pointed overall to a
firming economy.
    The size of the rally provoked head scratching by many
analysts trying to pinpoint the exact impetus for the move, with
a large amount of short-covering seen exacerbating the fall in
yields.
    "There has been a little bit of a breakdown in European
peripheral debt that seemed to set off a little bit of a
'risk-off' trade ... despite the fact that we got a firm set of
data this morning," said Dan Mulholland, managing director in
Treasuries trading at BNY Mellon in New York.
    New applications for U.S. unemployment benefits hit a
seven-year low last week while consumer prices recorded their
largest increase in 10 months in April. 
    Factory activity in New York state expanded at its quickest
pace in nearly four years in May, but another report showed a
surprise slump in industrial output last month. 
    Greek government debt yields, meanwhile, rose to a two-month
high with traders citing a document detailing a retroactive tax
on non-resident holders of Greek bonds, which Greece's
government then denied. 
    Treasuries have rallied even as many investors see yields as
likely to rise as the economy gains momentum.
    Some of the gains are due to the expectation that central
banks globally will continue to provide loose monetary
conditions, with the European Central Bank expected to cut
interest rates next month.
    But a record number of speculators betting on bond yield
increases is also increasingly seen as behind the bond rally,
throwing the market off balance and sending yields lower
regardless of what the U.S. economic data shows.
    "The short positioning in the street has been really quite
severe," said Aaron Kohli, an interest rate strategist at BNP
Paribas in New York. "Too many people got short early and now
there is no one left to follow them into the trade and they are
covering themselves."
    Data last Friday showed that speculators' net bearish bets
in Eurodollar futures rose to a record high in the previous week
following an unexpectedly strong reading on U.S. payrolls in
April, according to the Commodity Futures Trading Commission.
 
    Bearish bets on five-year and ten-year Treasuries futures
have also increased in recent weeks.
    Benchmark 10-year notes were last up 11/32 in
price to yield 2.505 percent, after falling as low as 2.473, the
lowest since October 30.
    Thirty-year bonds were last up 19/32 in price to
yield 3.342 percent, after earlier falling as low as 3.303
percent, the lowest since June.
    

 (Editing by Diane Craft and Nick Zieminski)
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