US bonds rise after dismal auction, but outlook weak

TOKYO: Thirty-year Treasury bonds advanced in Asia on Friday on short-covering following plunges after the worst long-bond auction since February 2008 the previous day.

But the outlook remained weak as investors want to avoid volatility due to uncertainty over European debt crisis and a slowing US economy.

Falls in US stock futures prompted investors to cover their positions following sharp falls in Treasuries the previous day, Tokyo traders said.

The 30-year T-bond rose 30/32 in price to yield 3.739 percent, down about 5 basis points from late US levels.

The long-bond suffered its worst sell-off since 1994 the previous day after a measure of foreign demand -- the indirect bidder category -- accounted for just 12 percent of the sale, the lowest since February 2008.

"We are seeing some buy back, although volatility is extremely high reflecting moves in share markets. The long-end of the market will remain vulnerable to further selling pressure, while the short-end will be well supported," said Akihiro Nagata, head of foreign bond trading at Sumitomo Mitsui Banking Co in Tokyo.

"At the moment investor cash positions are extremely high. The market is watching whether such positions will shift into equities or bonds," Nagata said.

The spread between the two-year note yield and the 30-year bond rose to around 355 basis points on Friday from around 340 bps at the start of the week, although it was well below the 390 bps reached about a month ago.

Investor position in Treasuries remained short, though they were considering whether to heavily allocate funds to US bonds.

For instance, Japanese institutional investors may not find Treasuries too attractive taking hedging costs into account following recent falls in yields, and they may want to stick to Japanese government bonds, Tokyo traders said.

The yield on 10-year T-notes rose 16.5/32 in price to 2.274 percent, down about 6 basis points from Thursday.

September T-note futures were up 11/32 at 129-18/32.

Copyright Reuters, 2010