Treasuries ease

US Treasuries prices retreated on Tuesday as gains in the US stock market and a better-than-expected bid for a Spanish short-term debt auction curbed the bid for safe-haven US government debt. Prices rose on Monday when the euro zone crisis seemed to heat up after the yield on Spain's key 10-year debt rose to a five month high above 6 percent, a level seen as unsustainable.
But on Tuesday, a good reception for a Spanish debt auction spelled relief. Spain sold a more-than-planned 3.2 billion euros ($4.2 billion) of 12- and 18-month bills, drawing good demand from domestic banks. Yields rose sharply as expected.
The result knocked safe-haven German Bunds off their highs and sent US debt prices lower. The auction results encouraged a risk-on trade and US stocks advanced by over 1.5 percent, aided by a round of solid corporate earnings results.
Losses in the Treasury market were moderated, however, as nervousness remained ahead of an auction of longer-term Spanish bonds on Thursday. Spain is seen as the potential new source of contagion in the euro zone debt crisis.
"Policy makers in Europe are doing a good job at trying to instill some level of stability in the minds of investors but the reality is, the weakness in the economy and the lack of cohesiveness among the countries continues to exist," said Sharon Stark, chief fixed income strategist at Sterne Agee in Birmingham, Alabama.
Benchmark 10-year notes last traded 6/32 lower in price to yield 2.01 percent, up from 1.99 percent late Monday, while 30-year bonds shed 13/32 in price to yield 3.15 percent from 3.13 percent.
"We have a 10-year note auction on Thursday in Spain and that will be very important," said Wilmer Stith, a portfolio manager of Wilmington Trust Broad Market Bond Fund, part of Wilmington Trust Investment Advisors with about $15 billion in assets under management. "Spanish yields are below 6 percent which is somewhat encouraging going into Thursday's auction."
With the ECB focused on fiscal discipline, sovereign debt and financial strains in the euro zone are likely to be long-term players in market concerns.
In the United States, Stith said last week's disappointing US payrolls growth continued to hold US interest rates captive at low levels.
The market will focus on Thursday's weekly jobless claims report, but visibility on job growth might not get clearer until the following week's report when some of the cloudiness from recent holidays is removed.