Longer-dated bonds inch up on doubts over EU debt plans

LONDON: Longer-dated US Treasuries inched up on Monday on doubts about that European policymakers meeting again on Wednesday will come up with a comprehensive agreement to fix the euro zone debt crisis.

Treasuries erased losses made earlier as equities gained on signs of progress after a weekend EU summit on plans to recapitalise euro zone banks and leverage the region's bailout fund although decisions were deferred to Wednesday's meeting.

However, sharp differences remain among policymakers over the size of losses private holders of Greek government debt will have to accept, cooling some of the optimism in riskier assets.

"I'm not sure they will fire the big bazooka some people expect but (provide) the bare minimum," RIA Capital Markets strategist Nick Stamenkovic said.

"They need to put plans in place to recapitalise the banks and put firewalls to limit contagion and draw a line under Greece otherwise the rally in risk markets will run out of steam or reverse and we'll see a renewed decline in core government bond yields," he added.

US 10-year T-notes were last up 4/32 in price to yield 2.20 percent, 1.2 basis points less than in late US trade on Friday. The benchmark yield has hovered in a range of 2.294 percent to 2.077 percent over the past week before Sunday's EU summit.

The 30-year T-bond rose 15/32 in price to yield 3.239 percent, down 2.6 bps.

"The flows we've seen have been Japanese houses selling and some real money coming in and buying," Craig Collins, a trader at Bank of Montreal in London said. "As equities have pared their earlier gains we've seen now leveraged guys coming in and covering some shorts... Europe continues to dictate market direction and now we wait for the next meeting on Wednesday."

Treasuries underperformed German Bunds, pushing the 10-year T-note yield premium over Bunds 5 bps up to 14 bps, with data showing that the euro zone private sector fell further into decline in October giving Bunds an added lift.

"It looks increasingly like the European economy is going to register a mild contraction in the fourth quarter judging by the PMI surveys whereas US data suggests the US will probably avert a recession," Stamenkovic said.

Barring a sharp reversal in riskier assets after Wednesday's EU summit, economic data due this week -- starting with the Conference Board's October consumer confidence index on Tuesday -- could nudge Treasury yields higher if they add to the recent batch of data showing a modest pace of economic growth, strategists say.

Copyright Reuters, 2011