Long bonds find support, 10s/30s curve flattens

HONG KONG: Thirty-year Treasury bonds rose in Asia trade on Tuesday as a jump in yields lured some buyers, even as the long end remains the market's weak spot with the clock ticking down towards a technical default.

But Treasury futures slipped as S&P futures pointed to slight gains later in the day following Monday's slide, with the S&P 500 having lost nearly 5 percent since peaking earlier this month due to poor economic data and the raging euro zone crisis.

September T-note futures were down 1.5/32 at 124-28/32 but hovered near an eight-month high of 125-12/32 struck last week.

European shares were set to edge higher in early trade. A plunge in European bank shares has battered global equities and driven down the Dow Jones Euro Stoxx nearly 8 percent in the past seven trading days.

Asian stocks were mostly weaker, with financial shares one of the biggest drags on Japan's Nikkei average.

The threat of a technical US default and the ongoing euro zone troubles have yanked Treasuries in two different directions, with short-term notes seeing safe-haven flows even as the long end suffers.

The 30-year bond was up 7/32 in price to yield 4.299 percent, down about a basis point from late US trade but still up about 12 basis points in the past week.

The gains at the long end also helped lift the 10-year note 3/32 to yield 2.922 percent, unchanged on the day.

As a result, the 10-year/30-year spread shrank a basis point to 137.8 bps, steadying after having steepened to an eight-month high of 138.5 bps the previous day.

The White House said on Monday it was working on a fall-back budget plan because Democrats and Republicans showed no signs of narrowing the ideological divide on how to cut the deficit.

Only two weeks are left until Aug. 2, when the US Treasury will default on its debt obligations unless action is taken to lift the government's debt ceiling.

Republicans said they will push for a measure to cut and cap government spending, as well as amend the Constitution to require a balanced budget. President Obama has already said he would veto such a measure should Congress send it to his desk.

But a symbolic vote would give conservative Republicans a chance to argue their position and provide House of Representatives Speaker John Boehner some political cover to pursue a compromise.

Copyright Reuters, 2011