US Treasury Outlook: Greece aid, bond agreements centre stage

A deal between European leaders to help avoid a restructuring of Greek debt has calmed global markets, but Treasury traders say Greece will still be the main attraction when trading begins next week. French and German leaders agreed on Friday to try to foster a scenario in which European banks maintain their exposure to Greek debt in order to avoid forcing Greece to default.
News of the agreement calmed markets and took a safety bid away from Treasuries. But things could easily turn around on Monday, depending on the outcome of talks between European Union finance ministers on Sunday to decide whether to disburse the next instalment of an aid package to Greece.
EU leaders are also planning to meet starting on Sunday to hammer out the details of the agreement with private bondholders. They will have to come up with a scenario that appeases the ratings agencies. Fitch said this month it would consider a straight rollover of Greek debt to be a technical default. "They have to make sure that the ratings agencies are happy with this," said Roseanne Briggen, an analyst at IFR, a unit of Thomson Reuters, in New York. "They still have a lot more to iron out."
"It's going to have to have a lot of bells and whistles so it doesn't look like a default to the ratings agencies, and then I think Treasury yields can pull back a little more," Briggen added. "But we're in a range, and I think we just go back to the higher end of the yield range." The 10-year Treasury yield has been hovering around 3 percent since the latest bout of turmoil in Europe began in late May. It finished at 2.93 percent at the close of trading on Friday. Analysts identified 3.10 percent this week as an important technical support level at the higher end of the 10-year yield's range.
Rich Bryant, head of Treasury trading at MF Global Securities in New York, said headlines from Greece would take precedence over domestic events, including a meeting of the Federal Open Market Committee at the Federal Reserve, scheduled for Tuesday and Wednesday.
"People will be paying close attention to the performance of the equity markets globally and see how they react," Bryant said. "Guys will be watching volatility in various markets to kind of get a sense of general investor sentiment." Of the FOMC meeting, Bryant said, "of course the statement will be closely scrutinised, but we aren't expecting any surprises out of the Fed."
A recent stream of weak US economic data has left some analysts wondering whether the Fed will have to take further measures to jump-start the economic recovery. But with a second around of Treasury purchases coming to a close at the end of June, the Fed doesn't have many options left.
Most economists think the central bank will go into a holding pattern, leaving rates unchanged at exceptionally low levels for even longer than previously expected. Traders said there was only a slim possibility that Sunday's talks could break down, but if they did, another strong flight to quality would take hold of the Treasury market and force yields lower.
"If they can't reach an agreement, it would truly be a European Lehman Brothers, where you don't have banks that are at risk and are interconnected; you have nation-states that are at risk and interconnected," said Christian Cooper, head of US dollar derivatives trading at Jefferies & Co in New York.