Treasuries move up

US Treasuries prices rose on Wednesday as nervousness that eurozone leaders and the European Central Bank will disappoint investors in meetings on Thursday and Friday added a safety bid for the safe-haven debt. US bonds also added to price gains late in the afternoon after Standard & Poor's said it may downgrade the European Union from the top credit ranking, and may cut the ratings of major banks in the region.
The ECB is expected to cut rates by at least a quarter point to 1 percent when it meets on Thursday, though many traders are also looking for signs on whether the central bank will be prepared to implement quantitative easing measures to contain the region's debt troubles. "I think some of the optimism has been tempered," said Anthony Cronin, a Treasuries trader at Societe Generale in New York.
"Investors will first look for a rate cut, I think that's pretty baked into the cards, and beyond that they will be looking for hints over how much further they are willing to go," he said. ECB President Mario Draghi last week said that eurozone leaders need to adopt tighter budget rules, which some traders saw as a hint that such a treaty would be a precondition to any bond buying program.
There is now strong pressure on European officials to come up with a credible strategy to shrink government budgets and unsustainable debt loads when they meet in Brussels on Thursday and Friday, and there is no shortage of questions investors want answered. "How are they going to ratify the treaties that they are talking about? Is Germany going to get the budgetary control over these countries? There's a whole host of things," said James Combias, head of government bond trading at Mizuho Securities in New York.
Markets also want to see details on how large any rescue funds for European debt will be, and how it will be funded, he said. Some conflicting comments from European officials before the summit caused investors to second-guess a positive outcome. A French minister said the French and German leaders will not leave the summit until a "powerful" deal is reached, but a senior German official at a pre-summit briefing was downbeat on reaching such a deal.
Treasuries got a lift earlier in the day from a report by Bloomberg News that the ECB was considering loosening collateral requirements for loans and that it may extend loan maturities to two years, traders said. Earlier, the ECB lent $50 billion in three-month dollar loans to banks at an auction. Prices also got a further boost late in the afternoon after S&P issued a warning on EU and bank ratings. The move came after the ratings agency on Monday warned it may implement broad downgrades of sovereign debt in the region.
Relatively light trading volume on Wednesday exacerbated prices moves, though traders said the market was relatively more active than earlier in the week as investors stay on the sidelines ahead of the key European meetings. "The market is very illiquid and it's very easy to push it around, so a lot of the moves are getting exacerbated at this time of the year," said Mizuho's Combias. Benchmark 10-year notes were last up 20/32 in price to yield 2.02 percent, down from 2.09 percent late on Tuesday. Thirty-year bonds rose 30/32 in price to yield 3.06 percent, down from 3.10 percent.