February 4, 2013 / 9:26 PM / 5 years ago

TREASURIES-Bonds up as stock losses, euro zone concern revive bid

* Spain, Italy political news revives bids for bonds
    * U.S. December factory orders rise 2.2 pct, less than
    * Bond yields hit nine-month highs in overnight selloff
    * Fed purchases $3.23 billion Treasuries due 2020-22

    By Ellen Freilich
    NEW YORK, Feb 4 (Reuters) - U.S. Treasuries prices rose on
Monday as higher yields attracted buyers and stock market losses
and political news from Europe fed a bid for safe-haven U.S.
    Wall Street stocks pulled back from five-year highs
while benchmark Treasury yields eased back below 2 percent after
climbing overnight to nine-month highs.
    A "2-percent (10-year yield) is a good buying opportunity
for most investors." said Sharon Stark, chief fixed-income
strategist at D.A. Davidson in St. Petersburg, Florida.
    Through Friday, Treasuries prices suffered their second
weekly decline on an improved outlook for the U.S. economy and
less anxiety about fiscal problems in Europe. But the push of
the Dow Jones industrials above 14,000 for the first time
since October 2007 on Friday was challenged by worries about
possible political shake-ups in Europe.
    Spain's opposition party on Sunday called for the
resignation of Prime Minister Mariano Rajoy over a corruption
scandal, as Rajoy sought to pull the euro zone's fourth-biggest
economy out of five years of financial woes. 
    The calls for Rajoy's resignation pushed Spanish 10-year
bond yields to six-week highs. Rajoy denies 
any wrongdoing. 
    In Italy, the increased popularity of former prime minister
Silvio Berlusconi and his chances of regaining power also raised
worries about Italy's struggle to fix its fiscal problems.
    "The primary catalyst for today's move up in U.S. Treasuries
prices was renewed concern about potential headline risk coming 
from the euro zone, though not to the degree we experienced last
summer," said Quincy Krosby, market strategist at Prudential
Financial in Newark, New Jersey.
    "Then in the U.S., factory orders came in below consensus
estimates and that set the stage for the 10-year Treasury yield
to pull back a little bit to below 2 percent after having gone
above 2 percent," she said.
    U.S. factory orders rose 1.8 percent in December, less than
the 2.2 percent increase forecast by analysts polled by Reuters.
At the same time, the Commerce Department also issued a revised
estimate of U.S. business investment plans, showing orders in
this area slipped 0.3 percent in December, contradicting the 0.2
percent gain reported initially. 
    The rolling of put options on the iShares Barclays 20+ Year
Treasury Bond fund TLT.P seen last week continued on Monday as
TLT shares rose 1.35 percent to $117.11. By rolling to the March
$116 strike puts from the Feb $120s, spread traders seemed to be
expressing the view that Treasury bonds might see more losses
over the next 39 days, even as the TLT sees a modest
flight-to-safety bid amid renewed worries about Europe on
Monday, said WhatsTrading.com options strategist Frederic Ruffy.
    But James Camp, managing director of fixed income at St.
Petersburg, Florida-based Eagle Asset Management, the asset
management arm of Raymond James with about $23.5 billion
in assets under management, said volatility data "do not suggest
a massive short trade in Treasuries at all.
    "The long short commitments of traders is something we look
at and the dealer community has not set itself up for a big move
higher in rates," he said.
    "Even the demand for insurance against rates going up has
ebbed since last week," Camp said. "We began the year with a
pretty bearish bias for Treasuries, but that bearish trade is
slowing down right now."
    Camp said one of the stories of the last six weeks has been
the relaxing of a flight-to-safety trade amid relief that the
U.S. government avoided some  - though not all - of the fiscal
restraint that would have occurred had no agreement been reached
between the White House and Congress.
    He said the most recent move - in which 10-year yields eased
back below 2 percent - acknowledges that the unwinding of the
safety trade went a bit too far.
    "Talk of a great rotation out of bonds into stocks is
premature," Camp said. "The Fed is going to be buying and the
economic fundamentals case has not changed, so a 2 percent
10-year yield is a buying opportunity."
    Benchmark 10-year U.S. Treasury notes rose 16/32
 in price to 96-31/32. Its yield eased to 1.96 percent from 2.02
percent on Friday.
    The 10-year yield earlier climbed to 2.059 percent, its
highest since last April 12 when it touched an intraday peak of
2.065 percent, according to Reuters data.
    The 30-year bond rose 29/32 in price, its yield
easing to 3.16 percent from 3.22 percent at Friday's close.
    The yield on 10-year Italian government notes 
rose 15 basis points near 4.50 percent, the highest since late
December, while the yield on 10-year Spanish sovereign debt
 jumped a quarter point to 5.44 percent. 
    Other factors that could propel bond prices higher this week
included the absence of new longer-dated government debt supply
and regular bond purchases by the Federal Reserve aimed at
supporting the economic recovery, traders and analysts said.
    The U.S. central bank will buy $3.23 billion in Treasuries
that mature between February 2020 and November 2022, part of its
$44 billion purchase of Treasuries in February.
    Moreover, some analysts cautioned the lack of a deal in
Washington to avert deep spending cuts set to kick in next month
could be a drag on the U.S. economy. These cuts, which would
total $112 billion in 2013, will likely hold bond yields at
their current levels, they said.

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