Bond prices fall in profit-taking from recent gains

US Treasuries prices fell on Friday as investors booked profits from a late-day rally Wednesday amid speculation the European Central Bank (ECB) may intervene to stem contagion in the troubled eurozone. Treasuries weakened even as Italy paid a record 6.5 percent to borrow money for six months, while its longer-term funding costs also soared.
--- Treasuries prices follow German bunds lower
--- German bund sell-off raises questions over safe havens
--- German, French CDS hit records, US highest since July 29
Credit default swap costs for core European countries, including Germany and France, also jumped to new records. Benchmark 10-year US note yields gave back some gains after falling to seven-week lows on Wednesday. The US market was closed Thursday for the Thanksgiving Day holiday.
"The eurozone remains the focal point with concerns about what is going on over there, but Treasuries really haven't gotten much of a safe-haven bid into the weekend - a lot of that action was seen on Wednesday. At these prices investors don't really want to step in," said Kim Rupert, managing director of global fixed income analysis at Action Economics in San Francisco.
The possibility that the ECB would intervene to try to stem the dramatic sell-off in European bonds kept some Treasuries investors on the sidelines ahead of the weekend, said Gennadiy Goldberg, interest rate strategist at 4Cast in New York. "A lot of people aren't very certain about how to play this. You don't want to go overly long Treasuries with the ECB potentially acting," he said.
The ECB is looking at extending the terms of loans it offers banks to two or three years to try to prevent the crisis from precipitating a credit crunch that chokes the region's economy, sources said. In an abbreviated post-Thanksgiving session, benchmark 10-year Treasury notes traded 24/32 lower in price to yield 1.97 percent, up from 1.89 percent late Wednesday. Thirty-year bonds traded 1-24/32 lower in price to yield 2.92 percent, posting the worst single-day performance in over two weeks, with the yield rising from 2.84 percent late Wednesday.
US bonds have benefited from a strong safety bid in recent months as investors dumped European bonds. However, an unexpectedly weak German bond auction Wednesday started to raise fears that safe havens could increasingly come into question. "With the bund auction failing, people are questioning if they need to rethink what they think of safety assets now," said Goldberg. The cost to insure Treasuries in the credit default swap market increased to their highest level in almost four months on Friday, rising 4 basis points to 59 basis points, according to data from Markit.
That means it would cost $59,000 per year for five years to insure $10 million in debt. German CDS costs also jumped 10 basis points to a record 124 basis points on Friday, Markit data showed. German and US government debt yields have been drifting apart as investors re-price eurozone debt. Ten-year German bund yields have risen 44 basis points to 2.17 percent since November 9. Ten-year Treasuries have fallen 3 basis points from 1.97 percent in the same time frame.
If investors lose confidence in the safety of German government debt, it could also mean they give up on Treasuries as a safe haven, a move that could have a damaging effect on bond yields. FTN Financial analyst Jim Vogel views the sell-off in German debt as a re-pricing of the bonds, but says it doesn't yet indicate a loss of its safe-haven status. "We haven't seen anything to suggest that there is a real question just yet," he said. Still, "it's something a lot of people have been watching."