Treasuries rise

US Treasuries prices rose on Thursday as credit worries about Europe fed safety demand for US bonds, temporarily pushing aside concern over the potential of a US default due to the debt ceiling gridlock. Disappointing demand at an Italian debt auction sparked worries that Italy, the eurozone's third largest economy, is closer to succumbing to the debt ills plaguing its neighbours.
That rekindled anxiety that the European debt crisis is far from over despite a recent aid package for Greece. "We had a poor auction in Italy, Spain is an ongoing worry, and it appears that despite an agreement and some aid coming to Greece it isn't a long-term fix - that is back in the picture," said Kim Rupert, managing director of global fixed income analysis at Action Economics LLC in San Francisco.
Treasuries trimmed gains on Thursday afternoon after the auction of $29 billion of seven-year notes. The sale brought a higher yield than investors had expected, indicating reluctance to buy the notes at current price levels. "The ongoing debt ceiling drama and the heightened level of market uncertainty probably kept some bidders away from (Thursday's) auction, but the fact remains that this issue has not drawn an overly aggressive bid at auction for several months," said Thomas Simons, money market economist with Jefferies & Co in New York.
Early market gains were also held in check after a bigger-than-expected fall in jobless claims and surprisingly strong data on home sales. The US House of Representatives is tentatively set to vote between 5:45 pm and 6:15 pm (2145-2215 GMT) on a deficit reduction proposal by Republican House Speaker John Boehner. It was unclear if Boehner's bill would overcome objections from conservative rebels in his own party and pass the Republican-controlled House. The Democratic-controlled Senate is to vote on the bill afterward, and Senate Majority Leader Harry Reid said it would be defeated.
There were still hopes a compromise could be hammered out five days before an August 2 deadline to raise the US government's $14.3 trillion borrowing limit. The lack of progress in Washington on a debt deal has spooked markets and escalated the chances that the world's largest economy could lose its coveted top-notch credit rating.
Benchmark 10-year notes traded 5/32 higher in price to yield 2.96 percent, down from 2.98 percent late on Wednesday, while the 30-year bond was up 12/32 in price to yield 4.27 percent from 4.29 percent. In light of Washington's fight over deficit reduction and an increase of the debt ceiling, there were some signs US Treasuries were falling out of favour as the go-to investment in Thursday's safe-haven move.
US government debt has lagged other AAA-rated sovereign bonds such as German Bunds and British gilts. For example, the yield spread between 10-year Treasuries and 10-year Bunds held at its widest level since February at 32 basis points, which is up from 14 basis points a week ago. In the derivatives market, the cost to insure US Treasuries for five years rose to 66 basis points, the highest level since early 2010, while one-year US credit default swap prices were quoted at 80 basis points after touching a record high 85 basis points, according to data firm Markit.