Bond prices slip as Europe fear trade pauses

NEW YORK: US Treasury prices fell slightly on Monday, as stocks gained on hopes Europe's leaders will devote more funds to bailing out debt-stricken countries in the region, dampening demand for the safe-haven US debt.

Benchmark 10-year yields rose to 1.86 percent, their highest level since the Federal Reserve last week said it would buy longer-dated debt, and sell short-dated notes, in a bid to lower long-term rates and stimulate the US economy.

The debt's yields has increased from more than 60-year lows of 1.674 percent on Friday as fears that European leaders were losing control of their debt problems and a slowing global economy sent investors scrambling for liquid, low risk assets.

"We're having a little bit of a relief trade, stocks got a bit of a bounce on Friday and it looks like we are going to get an okay open this morning," said James Newman, head of Treasury and Agency trading at Keefe, Bruyette and Woods in New York.

Policymakers over the weekend discussed the possibility of beefing up the euro zone's EFSF bailout fund for debt-stricken states, but they did not agree on any action.

Investors remain concerned about the ability of European officials to contain the crisis and anticipate markets will remain volatile.

"Europe is a day-to-day story, it seems like we flip flop back and forth over whether Greece is going to get the bailout they want and how concerned the markets are about Greece," said Newman. "I don't see that ending anytime soon."

Concern over the weakening US economy is also likely to continue to provide a bid for bonds.

Treasuries yields also now reflect renewed fears over deflation as the economy again looks vulnerable to slipping back into recession.

Inflation expectations as measured by 10-year Treasury Inflation-Protected Securities have dropped to the lowest levels in over a year.

Breakeven levels on the notes traded at 1.76 percent on Monday, the lowest since last September, and down over 10 basis points from before the Fed's statement last Wednesday.

Copyright Reuters, 2011