US Treasuries prices fell on Wednesday as a stock market rally and progress on the eurozone debt crisis damped investors' desire for safe-haven US debt. News that the eurozone planned to leverage its 440 billion euro rescue fund, the EFSF, "several fold" lifted stocks and further depressed safe-haven US government debt. The one exception was the Treasury's sale of five-year notes, which got a good reception as recent price cuts and a corresponding rise in yields drew buyers.
News of the well-bid auction briefly caused Treasuries to trim some losses, but bonds moved down again when stocks rose. Even as the eurozone news boosted riskier assets and hurt bonds, analysts said market volatility could persist. While the eurozone plans to leverage the EFSF, finance ministers will agree on the details of how that will be done only in November, according to a draft statement obtained by Reuters and to be issued after a summit on Wednesday.
The statement said two options are being considered to leverage the fund, one involving issuing risk insurance and the other built around the facility taking part in a special purpose investment vehicle. Both models could be deployed simultaneously, the draft statement said.
The Eurogroup of finance ministers will be asked to finalise the terms and conditions for how the EFSF will operate under the leverage schemes in November, the statement said. "Even when the plan is laid out, it does not necessarily mean that everything from then on will be very smooth. Volatility will continue in the markets," said James Barnes, senior fixed-income manager at National Penn Investors Trust Company in Wyomissing, Pennsylvania.
After Tuesday's rally, benchmark 10-year Treasury notes were down 26/32, their yields rising to 2.21 percent, up 9 basis points from on Tuesday. The 30-year bond was down 1-25/32, its yield rising to 3.22 percent from 3.13 percent on Tuesday. Hopes of a comprehensive strategy to tackle Europe's debt predicament were supported by news that Germany's lower house of parliament approved the motion to increase the firepower of the European Financial Stability Facility.
The strengthening of the 440 billion euro bailout fund is seen as a critical step to contain the crisis as policymakers seek agreement on the level of recapitalisation of European banks and the share of losses that private investors take on Greek sovereign debt. It looks likely that concrete figures on a crisis solution will not be unveiled until November 7-8, when EU and eurozone finance ministers are next scheduled to meet.
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