Bond prices drop on Europe, 10-year auction

NEW YORK (Reuters) - U.S. Treasury debt prices fell on Wednesday, giving back much of the previous day’s gains as diminished worries over Europe’s fiscally troubled countries and an auction of 10-year notes weighed on the market

European Central Bank Executive Board member Benoit Coeure helped ease concerns over Europe’s debt crisis by saying the ECB still had its bond-buying program as an option to employ. This helped damp demand for safe-haven U.S. Treasuries.

The U.S. government’s $21 billion offering of 10-year debt came largely in line with market expectations but some data within the auction results suggested weak demand, which was not surprising after bonds rallied back to expensive levels in the wake of last month’s sell-off.

Treasuries could remain under pressure on Thursday due to the government’s $13 billion offering of 30-year bonds, but continuing worries over Spain’s debt problems and slowing global growth are likely to provide a supportive environment after this week’s supply passes.

Wednesday’s focus on Europe was a reminder of the tensions that gripped markets late last year and early in 2012, and kept attention on how policymakers will respond if the euro zone’s crisis flares up again.

“I think that there’s just a sense that central banks will step in if declines in stocks get too precipitous,” said Kim Rupert, managing director of global fixed income analysis at Action Economics LLC in San Francisco.

“The auction helped with the little declines in Treasuries. It was kind of lackluster. There are people who just don’t like a 2 percent yield on 10-year notes.”

The benchmark 10-year note was last down 12/32 in price, yielding 2.03 percent. That was after the yield on 10-year fell to 1.96 percent on Tuesday, its lowest since early March.

Prices on the 10-year note edged slightly lower after the auction results were announced, sending yields briefly up to the day’s high of 2.05 percent.

The market showed little reaction to a report by the Federal Reserve that showed the U.S. economy kept growing moderately in the late winter months but rising prices for gasoline and other energy products were beginning to worry producers and consumers across the country.

Editing by Andrew Hay