T-notes range-bound before Spanish debt sale

LONDON: US Treasuries were range-bound ahead of a sale of Spanish debt on Thursday which will test investor confidence in the struggling euro zone sovereign and could set the tone for the next bout of trading.

US 10-year government bond prices dipped in line with German Bunds but yields kept below the important 2 percent mark. The yield was up 1.4 basis points at 1.99 percent, while 30-year US Treasury bond yields put on 1.6 basis points to 3.14 percent.

Spain aims to raise up to 2.5 billion euros of 2014 and 2022 debt. Domestic banks flush with European Central Bank liquidity are expected to snap up the relatively small size of supply on offer but the country could pay dearly for longer-term debt, further spooking nervous investors.

"If the auctions go well then (US) 10-year yields might move back above 2 percent, but if we see a disappointing response from investors, and tensions in the peripherals start to build again, then yields could conceivably head back towards 1.90 or below," said Nick Stamenkovic, strategist at RIA Capital Markets.

"In light of the two LTROs (long-term refinancing operations) delivered by the ECB since the end of last year, the question is whether domestic banks will want to increase their exposure further," he said. "I am a bit more nervous about the 10-year, banks don't tend to take that duration exposure and overseas investors would certainly be very reluctant to buy that part of the curve."

Ten-year Spanish government bond yields rose above the important 6 percent mark this week on worries that the euro zone's fourth largest economy will struggle to grow out of its debt. There are also concerns that its financial institutions are becoming increasingly vulnerable to another blow-out in peripheral bond markets, after domestic banks used cheap funding to buy their country's debt and benefit from a carry trade.

Analysts said the main thing to watch at the auction is whether the average yield holds below the 6 percent mark.

"The market would be surprised if those auctions don't go well. (But) if they don't go well, that could be the catalyst for the next rally in 10's and I think we could go to 1.92 (percent)," Bank of Montreal trader Craig Collins said.

Investors will also scour a series of data from the United States later in the session, in particular the weekly jobless claims to gauge the health of the world's largest economy. Earlier this month the number of Americans filing for jobless aid hit a two-month high, casting doubt over the strength of the labor market recovery.