US debt eases after best week since 2008

LONDON: US Treasuries eased on Monday with volumes thin after the largest one-week gain in two-and-a-half years, but sluggish economic data and a deepening euro zone debt crisis may limit the sell-off.

Benchmark US Treasury bond prices eased slightly as a tentative equity rebound took the shine off safe-haven assets, pushing yields on 10-year debt 1.4 basis points higher to 2.27 percent.

"Equity is doing better, it kind of adds to the softer tone," said Craig Collins, trader at Bank of Montreal, adding that he continues to favor the profitable trade of buying dips.

Two-year US government bonds were little changed, yielding a mere 0.19 percent. Traders said volatility in that maturity would be limited after the Federal Reserve's promise to keep interest rates near zero for at least two more years.

Flagging economic data has increased speculation the Fed may carry out a third round of quantitative easing. Disappointing housing or manufacturing activity data this week could fuel that view ahead of a key Fed conference in Jackson Hole, Wyoming on August 26.

But there are doubts that a third round of Fed bond-purchases will be enough to revive the world's largest economy.

"To me it just doesn't make sense. We have come off QE2 just very recently ... and it's just way too early to do QE3," a second trader said. "It pumps additional liquidity into the system which may not be needed and inflates commodity prices, and that's probably the last thing that the US consumer needs at the moment." US inflation data is also due this week.

A deepening euro zone debt crisis could also limit any sell-off in US Treasuries over the medium-term, especially if a meeting between French and German leaders on Tuesday disappoints. Investors are hoping for some sign that euro zone leaders are strengthening their response to the debt crisis.

Copyright Reuters, 2011