October 5, 2011 / 8:16 PM / 8 years ago

TREASURIES-Bonds dip as European moves undermine safety bid

 * IMF might buy Spanish, Italian bonds - official
 * Europe looks to strengthen banks after Dexia bailout
 * Less gloomy U.S. jobs, services data boost selling  (Updates market action, adds quote, changes byline)
 By Chris Reese
 NEW YORK, Oct 5 (Reuters) - U.S. Treasury debt prices slid for a second day on Wednesday as investors pared safe-haven bond holdings after the IMF said it may invest in euro zone bonds and as traders bet on more stimulus from the U.S. Federal Reserve.
 Fresh hopes that Europe’s debt turmoil would not spiral into a global crisis improved risk appetite and spurred selling in Treasuries.
 “It goes back and forth — now we are in a risk-on mode, we seem more comfortable that the folks in charge over in Europe are on top of things and that the proper solutions are going to be applied,” said David Coard, head of fixed-income sales and trading at The Williams Capital Group in New York.
 The International Monetary Fund could invest in Spanish or Italian government bonds in the secondary or primary market alongside the euro zone bailout fund, if needed, to help boost investor confidence in the debt, the IMF’s Europe head Antonio Borges said. For details see [ID:nN1E7940Z1].
 After bailing out French-Belgian lender Dexia (DEXI.BR), European finance ministers are looking to safeguard banks in the region in growing worries whether Greece will obtain more aid and avert a sovereign default that could ripple across the global financial system. [ID:nLDE794005]
 On this side of the Atlantic, Fed Chairman Ben Bernanke pledged on Tuesday that the Fed was prepared to do more to help the economy. Bernanke’s congressional testimony stoked speculation about the Fed possibly pumping more cash into the banking system in the form of a third round of outright Treasuries purchases, dubbed QE3.
 “That’s going to steepen the yield curve,” Dmitri Delis, fixed income strategist at BMO Capital Markets in Chicago, said of a possible QE3. “Some of that cash is going to push into stocks, commodities and other risky assets. It’s going to create inflationary pressure.”
 Investors and traders also lightened up on Treasuries to book profits on recent gains and after encountering technical resistance. The market is seen by some analysts as overbought.
 Benchmark 10-year Treasury notes US10YT=RR on Wednesday traded 20/32 lower in price to yield 1.89 percent, up from 1.83 percent late Tuesday. Worries over the European debt crisis and concern over stalling U.S. economic growth pushed benchmark yields down to 1.67 percent late last month, marking the lowest in at least 60 years.
 “Treasuries are certainly overvalued. Once overextended, you have a herd mentality to dump duration,” said Russ Certo, co-head of rates at Gleacher & Co in Stamford, Connecticut.
 Data showing a gain in U.S. private payrolls and a smaller-than-expected decline in U.S. service sector activity eased pessimism about the U.S. economy and compounded the selling in bonds, analysts said. [ID:nN1E79407S]
 The pullback in Treasuries was modest, however, in light of the stampede into bonds that had pushed the 30-year yield to its lowest level since January 2009 early on Tuesday.
 As traders speculated about another full-blown round of quantitative easing, the Fed conducted its third purchase for “Operation Twist” — a $400 billion program that extends the maturity of the central bank’s Treasuries holdings in a bid to lower mortgage rates and other long-term borrowing costs.
 The Fed bought $1.37 billion in Treasury Inflation-Protected Securities on Wednesday, which will be followed by the first “Twist” sale on Thursday which involves selling $8 billion to $9 billion in bills due January 2012 to July 2012.
 Thirty-year Treasury bonds US30YT=RR traded 1-7/32 lower in price to yield 2.86 percent, up from 2.81 percent late Tuesday.  (Additional reporting by Richard Leong; Editing by James Dalgleish)   

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