TREASURIES-Yields rise as U.S. housing data beats expectations

Fri May 16, 2014 11:27am EDT

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(Adds quotes, details, updates prices)
    * Treasuries yields rise after strong U.S. housing data
    * Spanish debt yields fall, reducing demand for Treasuries
    * Ten-year note yields hold above key 2.50 percent level
    * Fed buys $970 million in bonds due 2040-2043

    By Karen Brettell
    NEW YORK, May 16 (Reuters) - U.S. Treasuries prices fell on
Friday after unexpectedly better housing data pointed to a
strengthening U.S. economy, pulling benchmark 10-year yields up
from six-month lows.
    U.S. housing starts jumped in April and building permits hit
their highest level in nearly six years, offering hope that the
troubled housing market could be stabilizing. 
    "Housing starts were better than expected. They were higher
in just about every region, with the Midwest having the biggest
jump. That's causing the sell-off right now," said Michael
Chang, an interest rate strategist at Credit Suisse in New York.
    Bonds rallied dramatically on Thursday despite the release
of generally solid economic data.
    On Friday, benchmark 10-year notes were down
4/32 in price to yield 2.507 percent, up from a low of 2.473 on
Thursday, the lowest since Oct. 30.
    Thirty-year bonds fell 1/32 in price to yield
3.329 percent, after earlier falling as low as 3.303 percent on
Thursday, the lowest since June.
    Spanish and other peripheral European debt yields also fell
on Friday, reducing safety buying of U.S. debt.
    Much of the rally in Treasuries on Thursday was attributed
to safety buying as peripheral European debt weakened as well as
to a large number of traders having to cover their positions
after betting on yield increases.
    Some investors may have been moving out of European bonds in
anticipation of a weakening euro if the European Central Bank
cuts interest rates in June, as is widely expected, said Tom Di
Galoma, head of fixed income rates at ED&F Man Capital Markets
in New York.
    "I think some of the accounts are trying to get ahead of
that move," he said.
    Treasuries are also offering much higher yields than safer
European bonds including German government debt, luring
investors to U.S. government bonds and pushing down their
yields.
    "The spread between U.S. and European rates is very wide, so
that should keep U.S. rates lower than what they would be
otherwise because investors can reallocate their investment out
of Europe and into the U.S. to capture that extra yield," Credit
Suisse' Chang said.
    German 10-year government bonds yielded 1.33 percent on
Friday, 1.18 percentage points less than equivalent
Treasuries.
    The main focus next week will be the release on Wednesday of
the Federal Reserve's meeting minutes from April.
    The Fed bought $970 million in bonds due from 2040 to 2043
on Friday as part of its ongoing purchase program.

 (Editing by Chizu Nomiyama and Paul Simao)
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