Prices dip on signs of easing in Italy deadlock

NEW YORK: US Treasury debt prices fell on Thursday on signs a political deadlock in Italy may be easing, but safe-haven assets were expected to stay underpinned by worries the country's debt burden has become unsustainable.

"The focus is what's happening in Europe, and how our numbers here (US data) could change in the future due to the slowdown in Europe," said Rick Meckler, president of investment firm LibertyView Capital Management in New York.

Despite Thursday's dip in prices, bond yields remain not far off historic lows, with some worries investors will not be at all anxious to buy up the $16 billion of 30-year bonds the Treasury will offer for sale on Thursday as part of its $72 billion quarterly refunding this week.

Benchmark 10-year Treasury notes were trading with a yield of 2.05 percent, up from a high yield of 2.03 percent in an auction of $24 billion of the notes Wednesday. Yields remain not far off the September low of 1.67 percent, which was the lowest in at least 60 years.

Thirty-year bonds were trading 1-7/32 lower in price to yield 3.09 percent, up from 3.03 percent late Wednesday. An auction of $32 billion of 3-year notes on Tuesday met solid investor demand, but a run-up in prices on Wednesday had investors showing only lackluster enthusiasm for the 10-year note sale.

"The flight to safety yesterday didn't do the 10-year note auction any favors as the pricey paper left many sidelined," said Michael Englund, chief economist at Action Economics in Boulder, Colorado, adding "the Treasury will be selling $16 billion in 30-year bonds today, and there are some concerns it could see the same fate."

US Treasuries remained solidly driven by Europe however.

Italy's ruling PDL party softened its insistence on early elections as the way out of a deep political crisis and said it was considering the option of a government led by respected international figure Mario Monti.

Italian bond yields fell back from the previous day's record highs of around 7.5 percent but remained not far below the 7 percent level, seen as unsustainable.

Indeed, the fiscal trajectory of Italy did not look like it could be maintained. Italy on Thursday sold 5 billion euros of 12-month treasury bills in an auction which analysts said went better than feared, even though the euro zone's third largest economy's borrowing costs soared.

Gross yields at the sale rose to 6.09 percent -- the highest since September 1997 -- from 3.57 percent at a previous sale of 12-month paper on Oct. 11.

A rate above 6 percent is likely to well outpace growth levels in the country in the coming year.

German government bond futures briefly hit new record highs in early trading before turning negative after Italian Prime Minister Silvio Berlusconi's ruling PDL party softened its insistence on early elections.

In Greece, the president's office said on Thursday that former European Central Bank vice-president Lucas Papademos will head the country's new crisis coalition, charged with saving the country from default and bankruptcy.

Papademos, a respected figure in European capitals and on financial markets, will lead a national unity government that must sign up to a 130 billion bailout deal with the euro zone before calling an early election.

Copyright Reuters, 2011