Treasury bonds fall, yields highest in month

NEW YORK: US Treasuries retreated on Tuesday, pushing benchmark yields to their highest in more than a month, as fears about Europe's debt crisis eased after most euro zone countries voted to expand the region's bailout fund.

Thirty-year Treasury bonds fell more than two points in price and the 10-year note dropped a point, with three-year yields climbing to a roughly 2-1/2 month peak.

Investors took comfort from voting in 16 of the 17 euro zone member countries that approved legislation to expand a stability fund for Greece and other struggling euro zone countries.

The parliament of Slovakia, the last of the 17-member bloc to vote, late on Tuesday rejected the expansion of the euro zone rescue fund as the government lost a confidence vote. But the outgoing administration expects the measure to be approved later this week. See

"The broad picture is one where you have a relaxation of the situation in Europe," said Jens Nordvig, global head of fixed income and foreign exchange strategy at Nomura in New York.

"On the back of that, we have the euro and equities trading a little better. The mirror image of that is that the core bond market is giving some of its gains over the last month and a half." An improving US economic outlook has also weighed on Treasuries. Analysts said gains over the last few weeks were overdone and investors were way too pessimistic about global prospects.

A three-year note auction totalling $32 billion drew solid demand, with the yield broadly in line with expectations. The 3.30 bid-to-cover ratio, a measure of demand by comparing total bids with the amount offered, was above the market average the last 12 auctions for the same maturity.

Brian Dolan, chief strategist at Forex.com in Bedminster, New Jersey, said the three-year yield at the auction was a "reflection that rates have backed up a bit and that's in line with the rebound in risk sentiment and improvement in the US economic outlook."

On Wednesday, the Treasury will auction $21 billion in 10-year notes, with recent auction data indicating healthy demand for the security.

The bid-to-cover ratio for 10-year notes declined last month to 3.02 and was below the previous 12-month average, Barclay’s capital said in a research note. But the yield in most auctions had been in line with forecasts, with the exception of the latest one, which tailed by 1.2 basis points.

In late afternoon trading, benchmark 10-year notes traded 25/32 lower to yield 2.16 percent, up from 2.07 percent late on Friday. The 10-year yield rose as high as 2.18 percent, its highest since September 1. It was about 50 basis points higher from a 60-year trough hit more than two weeks ago.

There were no settlements on Monday as the US bond market was closed for the Columbus Day holiday.

Thirty-year bonds on Tuesday traded 2-2/32 points lower in price to yield 3.11 percent, up from 3.01 percent at Friday's close. The three-year Treasury note fell 3/32 in price to yield 0.52 percent. Three-year yields, at one point, hit 0.55 percent, their strongest level since August 1.

The current three-year yield is roughly 20 basis points above the lowest-ever auction yield for three-year notes, which fixed at 0.334 percent on Sept. 12. Also later on Tuesday, the US Senate is expected to pass legislation later aimed at pressuring China to let its currency rise in value against the dollar.

Most analysts expect the bill to die in the US House of Representatives, but the bond market could still be affected because of the legislation's inflammatory effect on China, which has the largest holdings of US Treasuries.

Copyright Reuters, 2011