US 10-yr notes ease, may dip after EU decision

SINGAPORE: US 10-year Treasury notes inched lower in Asia on Monday, and may come under further pressure in the near-term if European leaders decide on a framework for containing the euro zone's debt crisis at a summit meeting on Wednesday.

Ten-year Treasuries dipped 3/32 in price to yield 2.226 percent , up around 1 basis point from late US trade on Friday. The 10-year yield has hovered in a range of 2.294 percent to 2.077 percent over the past week.

Safe haven Treasuries could come under additional pressure if European leaders reach a decision on Wednesday on reductions to Greece's debt burden, a program for recapitalising euro zone banks including its possible size, and a framework for maximising the firepower of the euro zone's rescue fund, said a portfolio manager for a major Japanese bank in Tokyo.

"I get the sense that market players want to take the stance that Europe's problems are over for the time being," he said.

If such market sentiment takes hold and coming US economic indicators such as jobs data and the Institute for Supply Management's surveys of the manufacturing and non-manufacturing sectors come in strong, the 10-year yield may rise to around 2.6 percent by year-end, he added.

European Union leaders made some progress towards a strategy to fight the euro zone's sovereign debt crisis on Sunday, but final decisions were deferred until a second summit on Wednesday.

Treasuries seemed to take in their stride a Bank of America Merrill Lynch research note published on Friday saying the United States will likely suffer the loss of its triple-A credit rating from another major rating agency by the end of this year due to concerns over the deficit.

A second downgrade -- either from Moody's or Fitch -- would follow Standard & Poor's downgrade in August on concerns about the government's budget deficit and rising debt burden. A second loss of the country's top credit rating would be an additional blow to the sluggish US economy, Merrill said.

There had been concerns that the S&P downgrade in August might roil Treasuries, but 10-year Treasuries ended up rallying over the next couple of months, buoyed by worries that the US economy may be slipping into recession and as jitters over the euro zone's debt crisis bolstered safe haven demand for Treasuries.

Copyright Reuters, 2011