Yields edge up in Europe before EU summit

LONDON: US Treasuries dipped in Europe on Wednesday, giving back some of the previous session's gains in thin trade before a European Union summit, with policymakers are deeply divided on key issues to tackle the region's debt crisis.

The near-term outlook hinges on the outcome of the summit, which many investors had hoped would come up with measures to strengthen a bailout fund and to turn around Greece's finances.

But the prospect of supply, with $99 billion of two-, five- and seven-year debt due to be sold this week, also put pressure on the Treasury market.

Benchmark 10-year Treasury yields were 3 basis points higher at 2.14 percent, with T-Note futures down 4/32 at 129.00.

"We're mostly following the Bund market," a trader said. "People had a lot of short positions yesterday and were forced out but if we hold at these levels for when New York comes in we may see some more sellers coming in."

While there appears to be broad consensus on the need for around 110 billion euros ($150 billion) to be injected into the European banking system to help it withstand a potential Greek debt default and wider financial contagion, there was little clarity on how to proceed with beefing up the bailout fund and how large "haircuts" on Greek debt should be.

Weaker-than-expected US data on housing and consumer confidence revived worries about a US recession, helping Treasuries march higher on Tuesday.

Dealers were also making room for a $35 billion of five-year notes later in the day. Yields on five-year notes on the "when-issued" market , considered a proxy for where the high yield will come in at auction, were trading near 1.04 percent on Wednesday.

"Recent auction statistics highlight an uptick in demand for the sector. The bid-cover ratio has steadily increased since June, while tail data have been improving," Barclays Capital analysts said in a note. "This is due largely to an increase in participation of domestic investment funds. On the other hand, the five-year sector has recently richened on the curve."

Copyright Reuters, 2011