February 5, 2013 / 6:15 PM / 5 years ago

TREASURIES-U.S. bond prices fall on equities gain, European data

* Private index on euro zone business hits 10-month high
    * U.S. services sector grew at slower pace in January -ISM
    * Fed to buy $1.25 bln to $1.75 bln debt due 2036-2042
    * U.S. sells record amount of one-month bills
    * Long-dated yields rise on talk of "exotics" hedging


    By Richard Leong
    NEW YORK, Feb 5 (Reuters) - U.S. Treasuries prices fell on
Tuesday as a rebound in Wall Street stocks and less gloomy data
on European business activity cut the appetite for safe-haven
government debt, pushing benchmark yields back above 2 percent.
    Adding to the bond selloff, yields on Italian and Spanish
sovereign debt fell, after a jump on Monday on worries about
possible political shake-ups in the two countries, the euro
zone's third and fourth biggest economies.
    Selling of long-dated hedges on debt securities that are
known as power reverse dual currency notes also weighed on
Treasuries prices. Dealers have been unwinding hedges on these
"exotic" products due to weakness in the Japanese yen against
the dollar, traders and analysts said.
    "The key in the near term is the movement in Spanish and
Italian yields. We are seeing a small reversal after Monday's
move. We are seeing Treasuries yields rising in response," said
Brian Reynolds, chief market strategist at Rosenblatt Securities
in New York.
    Benchmark 10-year Treasuries notes were 17/32
lower in price at 96-17/32, yielding 2.018 percent, up 6.1 basis
points from late on Monday when the 10-year yield hit a more
than nine-month high.
    The 30-year bond was 31/32 lower in price at
91-8/32 for a yield of 3.208 percent, up 4.6 basis points from
Monday's close.
    On Wall Street, the three major stock indexes rose after
falling on Monday in the biggest one-day drop since November. 
 
    "It's a reversal in risk appetite after yesterday," said
Richard Gilhooly, fixed-income strategist at TD Securities in
New York.
    Risk appetite was helped by a partial recovery in Italian
and Spanish government debt, a day after their investors sold on
worries of political instability in Spain and Italy.
    The yield on 10-year Spanish government notes 
fell from Monday's six-week high to 5.37 percent, down 6 basis
points, while the yield on Italian sovereign debt 
slipped to 4.45 percent, down 2 basis points from late on
Monday. 
    There were also signs the euro zone's economy may be turning
the corner.
    Markit's Eurozone Composite PMI, which is based on business
activity across thousands of companies, rose in January to a
10-month high of 48.6 from 47.2 in December - an improvement on
the preliminary reading, though still below the 50 mark that
divides growth and contraction. 
 
    The Institute for Supply Management said U.S. services
industries grew at a slower pace in January. The data was
consistent with a moderately growing economy and allayed fears
that the slight contraction in U.S. growth in the fourth quarter
might turn into something more lasting. 
    On the supply front, the U.S. Federal Reserve will buy
$1.534 billion in Treasuries that mature between February 2036
and November 2042, which is part of its $44 billion purchase of
Treasuries in February.
    The U.S. central bank has been buying Treasuries and
mortgage bonds in an attempt to lower borrowing costs and 
stubbornly high unemployment.   
    The U.S. Treasury Department sold $45 billion in one-month
bills, which is a record amount for this
maturity. These one-month T-bills fetched an interest rate of
0.065 percent, compared with 0.035 percent on the $30 billion of
one-month bills sold last week. 
    
    EXOTICS MOVE
    In the derivatives market, there were signs of reduced
demand for long-dated, fixed-rate payments in the dollar
interest rate swap market, which some analysts said was due to
dealers unwinding hedges on power reverse dual currency notes. 
    Some Japanese investors have held these "exotic" but risky
debt products, on which they were receiving higher coupon
payments when the yen was rising against the dollar in the
aftermath of the global financial crisis.
    Since last fall, speculation the Bank of Japan would ramp up
monetary stimulus to help the economy led to a dramatic
weakening of the yen versus the dollar. On Tuesday, the
yen hit a 2-1/2-year low against the greenback at 93.51 yen,
down about 21 percent from September, when speculation on the
BoJ started. 
    With the yen weakening, the coupon payments on these notes
should fall, and dealers who sold these notes will likely need
less long-dated cash payments to ensure they meet their coupon
payments to investors, analysts said.
    The discount on the 30-year dollar swap rate to the 30-year
Treasury bond yield, which narrows with lower demand for
long-dated, fixed-rate cash flows, briefly narrowed to 15.25
basis points, a level not seen since March 2010. It widened out
to 16.25 basis points, unchanged on the day.

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