Bond prices retreat on EU rescue plan hopes

LONDON: US Treasury debt prices slipped in Europe on Wednesday as regional equities rallied on revived hopes that a European Union summit this weekend would take bold steps to tackle a debilitating debt crisis, offsetting a Spanish ratings cut.

Safe-haven demand for Treasuries soured late on Tuesday after Britain's Guardian newspaper reported that France and Germany had agreed on a deal to increase the euro zone bailout fund's rescue fund five-fold. The reported agreement was later denied by two senior EU officials but equities held firm.

Treasuries gained some ground against German government bonds, narrowing the 10-year T-note yield gap over Bunds to 9 bps from 11 bps in late European trade on Tuesday, after a 4.075 billion euro auction of German 10-year debt drew weak demand.

Ten-year note futures dipped 14/32 to 128-25/64. The 10-year note yield last stood at 2.214 percent , 4 bps up from late New York levles and staying above the previous day's intraday low of 2.077 percent, which was the lowest since Oct. 7.

"With equity markets doing so well it's going to be hard pressed to have Treasury yields retouch those low levels. Something has to change and that will be a risk-off trade," Craig Collins, a trader at Bank of Montreal said.

"There's a little bit of a mixed message from all interested parties in the euro zone debt crisis but risk markets are still optimistic. Equities are still trading OK," he said.

While traders will be looking at US data due later on Wednesday expected to portray modest economy growth, the euro zone's debilitating two-year debt problems remain the market's overarching theme before the weekend summit.

Among the data, US housing starts are estimated to have risen to an annualized rate of 0.59 million in September from an annualized 0.57 million in August. A figure showing a notably quicker pace of house building could help riskier assets like stocks and further erode safe-haven assets like Treasuries.

September's US consumer price index (CPI) should also get some attention after data on Tuesday showed higher-than-anticipated PPI and the spike in UK inflation in September revived the potential of global inflation risks.

"There is cause for concern for US medium-term inflation risks stemming from extraordinary monetary accommodation, beyond what seems to be priced in terms of risk premia," Lloyds strategists said in a note.

Copyright Reuters, 2011