Treasuries edge lower, outperform euro zone debt

LONDON: US Treasuries inched lower on Wednesday but outperformed versus German bonds as the crisis in the euro zone supported demand for safe haven debt issued outside of the troubled currency bloc.

Treasury futures fell 1/32 to 130-05/32. Ten-year yields were last at 1.9941 percent, testing the 2 percent level but still within 12 bps of historic lows set earlier this week.

Comments suggesting the European Commission was moving towards a common euro zone bond saw German debt give up early gains and also weighed on US Treasuries somewhat. The spread between higher-yielding 10-year Treasury yield and equivalent German yield narrowed by around 3 basis points to 18 bps.

"Markets have been driven by Europe so far and there's been some pretty decent selling of Europe versus US that has helped to contract the spread there," said Craig Collins, trader at Bank of Montreal in London.

Thirty-year bonds were steady heading into the US Treasury's $13 billion sale of long bonds. The sale was unlikely to see improved demand relative to the week's two previous mediocre auctions where low yields curbed investors' appetite.

Expectations that the Federal Reserve would not target the longest US government debt maturity in any new stimulus programme to help the economy may also temper demand for the 30-year issue.

"If they're not going to target the ultra-long area then that may impact on the auction. But with the whole issue in the euro zone and the weakness in the economy, irrespective of the auctions, the risk is for yields to move down rather than up," said Bloxham Stockbrokers' chief economist Alan McQuaid.

US retail sales data due later in the session was forecast to show further slowing, adding to the backdrop of a weakening economy currently providing support for US Treasuries.

Copyright Reuters, 2011