Up in Europe as equities retreat supports safety bids

LONDON: US Treasuries prices pushed higher in European trading on Tuesday after data showed German growth all but stagnated in the second quarter, souring appetite for regional equities and supporting safe-haven government debt.

The pan-European FTSEurofirst 300 index fell 1.3 percent after German gross domestic product grew just 0.1 percent in the second quarter, bringing to the fore investors' concerns about slowing global growth.

September 10-year futures rose 4/32 to 129-22/32 while in the cash market 10-year T-notes were up 8/32 in price to yield 2.287 percent , 2 basis points less than in late New York trade on Monday.

"We're seeing a little bit of a better bid in Treasuries on the back of equities weakness but volumes in general have been relatively low," a trader said.

On Monday Treasuries fell as investors unwound long positions after US stocks gained sharply for a third straight session. US stock futures pointed to a pullback on Wall Street later in the day.

Treasuries underperformed German Bunds, with 10-year T-notes yielding two bps less than Bunds versus 8 bps in late European trade on Monday.

Some market focus was on a Franco-German meeting later in the day to discuss what further measures could be taken to contain Europe's debt crisis, although many investors don't expect to see major developments from the meeting.

French President Nicolas Sarkozy and German Chancellor Angela Merkel meet in Paris from 1400 GMT. A joint news conference is due at 1600 GMT.

"In all likelihood much damage has already been done to global business and consumer confidence by the lack of political leadership in the euro area, and it is unclear how much substance, if any, market participants actually expect from today's meeting," Lloyds strategists said in a note.

Market speculation is centred on the creation of common euro zone bonds as part of an effort to better coordinate solutions to prevent the so-far intractable debt crisis from wreaking havoc on the global economy, traders and strategists say.

But so far there is no sign that Sarkozy and Merkel -- who head the euro zone's two biggest economies -- will discuss the development of euro zone bonds, which could rival US Treasuries in the global capital market.

The 30-year T-bond was up 14/32 in price to yield 3.19 percent . Japanese institutional investors were looking to reallocate their funds in medium- and long-dated Treasuries as well as US corporate debt to raise returns heading into the second half of the Japanese financial year starting in October, some Tokyo-based traders said.

They are also believed to be holding large cash positions, having locked in some profits from Treasuries in recent rallies and slashing positions in euro-denominated debt due to uncertainty about the region's debt crisis, they said.

Copyright Reuters, 2011