US bonds dip after Europe agrees debt deal

LONDON: US Treasury prices fell on Thursday as riskier assets rallied after European leaders clinched a deal with private bondholders for a 50 percent loss on their Greek government bond holdings.

Heads of government also agreed to scale up their 440 billion euro ($600 billion) EFSF bailout fund, though final details would only be worked out next month.

Treasuries followed German Bunds lower while global equities and the euro rose to their highest in nearly two months after the deal. The 10-year T-note yield premium over Bunds was little changed around 10 bps.

The 10-year T-note was last 10/32 down in price to yield 2.243 percent, up 3.6 basis points from late New York levels, with traders seeing scope for it to break out of the 2.294 to 2.077 percent range that has held since the start of last week.

"I look at it and think this is a profit-taking position as it seems to be risk-on appetite. But I'd have thought there would be a little bit more aggressive selling.. There's been more marking the bonds lighter at the moment," a trader said.

"The risk is we could see (yields rising) even further. Possibly looking at 2.35 percent is the first level that we'll see and then 2.50 percent is what the market is going to target afterwards," he said.

While the EU crisis package is seen as adequate for now to avert a meltdown in financial markets, doubts remain on whether it can improve the region's growth prospects, crucial for struggling states to get out of their debt holes.

Concerns also remained on the lack of detail on how the scaled-up rescue fund will work and whether it can get the financial backing it needs from countries such as China.

"There has been a large risk-on move in response to the headlines but this could all well be given back if concrete proposals are not forthcoming," Rabobank strategists said in a note.

T-note futures were last 10 ticks down at 128-17/64.

In the near term, 10-year notes could take cues from US third-quarter gross domestic product data due later on Thursday as well as any fresh developments in the euro zone, a Tokyo-based trader said. He added that 10-year Treasuries were likely to attract buyers if the yield rises to around 2.3 percent.

Economists estimate GDP grew at an annual pace of 2.5 percent, according to the median of a Reuters poll. That would mark a sharp rebound from the 1.3 percent logged in the second quarter and far from what some feared just a few weeks ago.

Traders are also focusing on a sale of seven-year notes which could round out a week of solid demand for new government debt. The Treasury will sell $29 billion of the notes on Thursday, following solid demand in auctions of $35 billion of two-year notes on Tuesday and $35 billion of five-year notes on Wednesday.

Copyright Reuters, 2011