US 10-year notes slip as Italy jitters ebb

SINGAPORE: US 10-year Treasury notes fell in Asia on Monday suggesting market confidence may be returning after Italy's new leadership was charged with implementing economic reform measures to end a crisis that has endangered the euro zone.

Ten-year Treasuries fell around 20/32 in price to yield 2.129 percent as trade resumed after the US bond market was closed on Friday for a holiday. The 10-year yield rose around 7 basis points from late US trade on Thursday.

Italy's president asked former European Commissioner Mario Monti on Sunday to form a government after a frenetic weekend during which parliament passed economic reforms and Prime Minister Silvio Berlusconi stepped down.

"I get the sense that focus on Europe as a market theme has eased a bit," said Yoshio Takahashi, fixed income strategist for Barclays Capital in Tokyo.

A 3 billion euro auction of five-year Italian government bonds later on Monday is unlikely to be shunned by investors, Takahashi said, adding that a rise in Italian bond yields over the past month should help attract some demand.

"I don't think investors will all stay away at the current yield levels," he said, adding that the market's focus may now turn to fiscal policy negotiations in the United States.

The US congressional "super committee" is at a difficult point in negotiations on a deficit-reduction deal. The special congressional committee, tasked with finding at least $1.2 trillion in federal budget savings over 10 years, faces a Nov. 23 deadline.

"With the November 23 time limit approaching, the market might react if there are any negative headlines," Takahashi said.

However, whether any news that heightens market concerns about US fiscal policy will spur selling of Treasuries is unclear, Takahashi said, adding that Treasuries could be supported if such news prompts investors to pare back risk-taking.

The "super committee" of six Democrats and six Republicans is struggling to meet the deadline that is less than two weeks away. Once a deal is reached, Congress will have until Dec. 23 to vote on the committee's recommendations.

If either deadline goes unmet, automatic spending cuts would be triggered on domestic and military programs, beginning in 2013, as part of a law enacted in August.

Copyright Reuters, 2011