Bond prices dip on hints of Greece debt deal

NEW YORK: US Treasury debt prices eased on Friday as strength in some stocks and hints of a deal in the Greek debt crisis lessened safe-haven flows to US government debt.

After France and Germany said they were united on a deal to resolve the Greek debt crisis, some riskier assets strengthened. On Wall Street, the Dow and S&P 500 rose, while the Nasdaq was trading slightly lower.

Despite the bit of price weakness on Friday, investors were scarcely abandoning safe-haven investments. Price declines in US Treasury debt were narrow, with benchmark 10-year notes down just 6/32, their yields up to 2.95 percent from 2.93 percent on Thursday.

"You've had a six-week run of soft economic data and you still have a lot of uncertainty in the situation with Greece," said Kathy Jones, fixed-income strategist at Charles Schwab.

The day's key economic data, the Thomson Reuters/University of Michigan report on consumer sentiment, came in weaker than forecast but elicited little market response.

The readings were "quite representative of how people feel," said Cary Leahey, economist at Decision Economics. "Job growth is, at best, anemic and the unemployment rate is high. If you've been laid off, it's probably been for a long period. The one positive development is that gas prices have come down and businesses and consumers are not pulling in their heads."

The Conference Board's index of May leading indicators index rose 0.2 percent, as forecast.

With benchmark yields hovering near six-month lows, investors were left pondering the next direction for Treasuries, ahead of a Federal Reserve policy meeting next week and the end of the central bank's latest stimulus program, dubbed QE2, at the end of the month.

"We recommend a neutral Treasury market exposure until more concrete signs emerge that the market is poised to re-trend," said RBS US government bond strategist William O'Donnell.

"Daily and weekly momentum studies are into overbought territory," he added, citing resistance at 2.90 percent for 10-year yields and support at 3.10 percent, the 200-day moving average.

Traders said the market was consolidating recent gains, waiting for more data on the economy to set its next course, while also following news on the euro zone debt situation.

Bond investors want greater clarity on the US economy after the mixed signals this week. On one hand, regional manufacturing for June looked weak, pushing Treasuries prices up. On the other hand, US retail sales in May exceeded expectations, boosting prices of riskier assets like stocks and commodities and hurting prices of US debt.

O'Donnell said that even as dealers and other core shorts have frequently had to scramble to cover, other long-term holders of Treasuries have lightened up on long-term Treasury positions as 10-year note yields press below 3 percent.

At the end of this month, the Fed finishes its second program of large-scale purchases of US government debt, begun in November. The quantitative easing, intended to spur lending and economic growth, involved buying $600 billion in US Treasuries plus the reinvestment of funds from maturing assets in its portfolio of mortgage-backed securities.

The Federal Open Market Committee, the policy-making arm of the US central bank, will meet next week.

O'Donnell said risks were skewed bearishly for Treasuries, though the technical and fundamental outlooks were not yet clear enough to make a definitive call on the market.

Two-year Treasury notes traded unchanged in price to yield 0.39 percent, while 30-year bonds were down 18/32 in price, their yield rising to 4.21 percent from 4.18 percent on Thursday.

Copyright Reuters, 2011