NEW YORK: US Treasuries prices fell on Wednesday as optimism US lawmakers will reach a deal to raise the debt ceiling spurred renewed risk taking and dampened demand for safe haven debt.
Long bonds also continued to outperform shorter maturities, flattening the yield curve, on hopes spending cuts will help reduce the deficit, after a bipartisan group of US senators revived an ambitious budget plan that could provide new ideas for breaking the Congressional impasse over raising the nation's credit limit by Aug. 2.
The plan's revival narrowed the gap between 10-year notes and 30-year bonds by around 9 basis points to 130 basis points on Wednesday, their tightest level in a week.
"The big trade yesterday, and continues to be, is the curve flattening and I get the sense that that is relief that we will get some kind of credible package out of Washington," said Scott Graham, head of government bond trading at BMO Capital in Chicago.
Longs bonds have been whipsawed in recent days as investors worried that any plan to cut the deficit would disappoint in order to push through a deal before Obama's deadline on Friday.
The yield curve between 30-year bonds and 10-year notes is likely to continue to flatten on further positive news around the debt ceiling, according to analysts at Nomura.
We "remain convinced there is more to come," the analysts said in a report.
Fears over contagion from the euro zone's debt woes also appeared to ease Wednesday, one day before a meeting between European leaders to determine means of tackling Greece's spiraling debt crisis.
Uncertainty from the euro zone is, nonetheless, likely to continue as the region works through its debt problems and the affected countries try to institute austerity plans, said BMO's Graham.
"Its not just one nation that they need to get their house in order but its several nations," Graham said. "I think that everybody is so deep into this situation and exposure that its something that you will continue to hear about for months and months, as opposed to weeks and weeks."
Benchmark 10-year notes were last down 6/32 in price to yield 2.91 percent, up from 2.89 percent late on Tuesday.
Five-year notes fell 4/32 in price to yield 1.47 percent, up from 1.43 percent, and 30-year bonds dropped 7/32 in price to yield 4.21 percent, up from 4.19 percent.
Copyright Reuters, 2011
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