Fall before supply but markets still nervy

LONDON: US Treasuries fell in Europe on Thursday, giving up some of the recent hefty gains as investors made room for upcoming supply, although losses could be brief as tensions related to euro zone debt and a global slowdown continue.

The Treasury plans to sell $16 billion of 30-year bonds later on Thursday following a strongly bid 10-year T-note auction on Wednesday on the back of a flight to safety sparked by rumours of a French sovereign downgrade and about Societe Generale's outlook -- all denied.

The 10-year T-note yield was last up 5.6 basis points at 2.23 percent, while the 30-year bond yielded 8.4 bps more at 3.5883 percent. Two-year note yields were little changed at 0.19 percent.

"We have a bond (auction) later today and the market is trading a little bit cheaper and as equities recoup some of those losses we're giving up some of our gains, particularly at the back end because that's where supply is concentrated," said Craig Collins, trader at Bank of Montreal.

"If we break 1,150 in S&P that would spark another round of selling in Treasuries."

The S&P 500 index closed 4.42 percent lower at 1120.76 points on Wednesday. The FTSEurofirst 300 index of top European shares slightly higher after tumbling 4 percent to a two-year closing low in the previous session.

SAFETY FIRST

Traders say, however, that worries over US's economic outlook and ongoing fears that the euro zone debt crisis could spread beyond the battered southern states will keep investors looking for the safety of US debt.

The Federal Reserve's statement on Tuesday that it will keep interest rates on hold for at least another two years is likely to keep 'real money' investors interested in US paper.

"It's amazing to watch this intra-day volatility," one trader said. "We're seeing a bit of profit taking right now, but the overall move is still intact, rates stay low. As investors move to extend their maturities we will see ten-year and the long-end outperform (going further)."

Data over the next few weeks will be decisive for Treasuries. Weekly jobless claims later in the session are estimated to have totalled 400,000 in the week ended Saturday.

A higher number could help Treasuries recover Thursday's losses, traders say, while any relief sparked by a lower number is likely to be brief due to risks of the euro zone crisis turning into a global problem if it swallows Italy -- a G7 member and one of the largest debt markets in the world.

German Bund futures also fell in early trade after posting their biggest daily rise in 15 years on Wednesday. US T-notes yielded 1 basis point less than Bunds.

Copyright Reuters, 2011