February 14, 2013 / 4:20 PM / in 5 years

TREASURIES-Yields fall from 10-month highs, Europe GDP spurs buying

* Prices gain as weak European data spurs buying
    * Bonds briefly pare price gains as U.S. jobless claims fall
    * Treasury will sell $16 billion in new 30-year bonds
    * Fed buys $5.15 billion in debt due 2017-2018

    By Karen Brettell
    NEW YORK, Feb 14 (Reuters) - U.S. Treasuries yields edged
back from 10-month highs on Thursday after data showed that the
euro zone's two largest economies shrank more than expected late
last year, helping boost demand for lower risk debt.
    The German economy contracted 0.6 percent in the final
quarter of 2012, the worst performance since 2009, while
France's shrank 0.3 percent, which was slightly worse than
    The news pushed the euro down against the dollar and boosted
bond buying, helping benchmark 10-year note yields fall from
10-month highs of 2.06 percent reached in overnight trading.
    "Treasuries followed the rally in (German) bunds, which was
driven by weak GDP data," said Carl Lantz, an interest rate
strategist at Credit Suisse in New York.
    The debt briefly pared some price gains after data showed
that the number of Americans filing new claims for unemployment
benefits fell more than expected last week, pointing to a
continued steady improvement in labor market conditions.
    "The market is viewing this as another sign that economic
momentum continues to be reasonably strong. Jobs are key because
of the Fed focus on unemployment and because now we need labor
income to continue to be quite strong because that will help
offset the negative spending implications of the payroll tax
increase," Lantz said.
    Ten-year notes were last up 7/32 in price to
yield 2.04 percent.
    The notes have been pushing up against technical support at
around 2.03 percent to 2.06 percent, which is the top end of
their trading range for the past few weeks. A break above this
level could send yields up towards the 2.20 percent area,
analysts and traders said.
    Price gains came even as the Treasury prepared to sell $16
billion in 30-year bonds on Thursday, it final sale of $72
billion in new coupon bearing debt this week.
    Thirty-year bonds rose 15/32 in price to yield
3.21 percent. Traders expect the new bonds to
price stronger at around 3.20 percent, according to trading in
the "when issued" market.
    Some investors see Treasuries yields as likely to ease after
the supply is absorbed, with automatic budget cuts, scheduled to
come into effect on March 1, likely to come under increasing
focus. The cuts, if implemented, are expected to reduce economic
growth, which could send rates back lower.
    At the same time, calmer European debt markets, still steady
economic improvement in the United States and questions over
when the Federal Reserve will end its ongoing bond purchase
program, or quantitative easing, are leading others to price for
an uptick in yields this year.
    "There's kind of a tug of war between people that feel that
the sequester cuts coupled with higher taxes and the headwinds
of global growth are going to slow down growth enough so that
Treasuries will remain at a fairly low level," said John Fath,
managing partner at BTG Pactual in New York.
    "Others feel that at some point, there is a cost to QE and
that at some point the Fed is going to realize that those costs
are overwhelming the benefits," he added.
    The Federal Reserve bought $5.15 billion in debt due 2017 to
2018 on Thursday as part of its quantitative easing effort, the
last purchase scheduled for this week.
    The Treasury also said that it will sell $9 billion in
30-year Treasury Inflation-Protected Securitites (TIPS) next
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