Prices fall after Greek vote

NEW YORK: US Treasury prices fell on Thursday as Greece approved austerity measures needed to avert a debt default and data showed better-than-expected business activity in June in the US Midwest.

The selling marked the fourth straight day of losses in the Treasury market, spurred by good news from Greece mingled with worries that US debt was overpriced in the face of a brightening economic picture and a struggle to raise the country's debt limit.

Technical levels gave way to a trend toward higher yields, with the 10-year note breaking its 200-day moving average of 3.14 percent, and the five-year hitting its 200-day average of 1.78 percent.

Thursday also marked the end of the Federal Reserve's second quantitative easing program, or QE2, which began on Nov. 12, in which the Fed set out to purchase $600 billion in US Treasuries in order to lower long-term interest rates and stimulate the economy.

The selling started after the Institute for Supply Management's Chicago business barometer rose to 61.1 in June, topping economists' expectations for a reading of 54.

The Chicago purchasing manager's report was "substantially" better than expected, said Joe Larizza, director of governments and agencies trading at Vining Sparks in Memphis, Tennessee. "You have quarter end and you also have QE2 ending today. The dollar continues to come down a bit, too."

News that Greek and European leaders were making progress on plans to stave off a default on Greek debt took the safe-haven appeal away from Treasuries starting on Monday, and selling continued as more reassuring developments emerged in Europe.

The Greek parliament on Thursday completed the second of two rounds of voting needed to put in place a mid-term austerity plan, paving the way for aid from the European Union and the International Monetary Fund that will help the country pay its debts.

The good news for Europe was bad news for bonds, and focus turned back toward the gridlock in the US government, which is stalling attempts to raise the legal borrowing limit before the United States reaches the point of technically defaulting on its debt.

S&P said on Thursday it would downgrade the US from AAA to D if it missed its debt payment on Aug 4, two days after the Aug 2 date the Treasury Department has given as the deadline for raising the debt ceiling.

But that anxiety was not enough to continue Treasuries' sell-off into Thursday.

"There will be some noise for the last day of the quarter and the last day of the Fed's operations some position squaring, some window dressing," said Rich Bryant, senior vice president of Treasury trading at MF Global Securities in New York.

Ten-year Treasury notes fell 21/32 in price, their yields rising to 3.19 percent from Wednesday's close at 3.11 percent. The 30-year bond briefly traded a full point lower in price and was last down 28/32 for a yield of 4.44 percent, up from 4.38 percent on Wednesday.

Five-year Treasury notes lost 14/32 in price to yield 1.78 percent, down from 1.69 percent late on Wednesday. Yields rose to 4.33 percent from 4.30 percent on Monday.

As the first half of the year comes to a close, US investment grade bonds have posted a 2.96 percent gain through Wednesday; Treasury Inflation-Protected Securities lead the way with a 5.97 percent rise, followed by municipal bonds, up 4.59 percent, then junk bonds, up 4.55 percent. Treasuries lagged, up 2.41 percent, according to Barclays Capital.

Copyright Reuters, 2011