Prices ease in some US economic optimism

NEW YORK: US Treasury debt prices fell on Wednesday on continued optimism that the United States is on the path to economic recovery a day after encouraging data.

But persistent concerns over the European debt crisis kept alive some safety bids, limiting losses. Yields traded not far off the 60-year low touched in September.

Benchmark 10-year Treasury notes were trading 9/32 lower in price to yield 1.99 percent, up from 1.95 percent late Tuesday, while 30-year bonds were 29/32 lower to yield 3.03 percent from 2.98 percent.

In Germany, an auction of 10-year bonds on Wednesday found better demand than in November, when a poor first auction of the same paper raised fears the euro zone debt crisis was spreading to the currency bloc's strongest economy.

Still, bids in the sale were only slightly higher than the amount on offer and were still below last year's average, showing less-than-overwhelming demand for the debt with no clear immediate solution to the euro zone debt woes.

Worries over Europe's debt crisis, along with jitters over the US economy, pushed US yields down throughout 2011, driving the rate on benchmark notes to a 60-year low of 1.67 percent in September.

Treasuries began the first trading day of 2012 on Tuesday with a sell-off after data showed stronger-than-expected US manufacturing growth and as investors took profits on the historically low yields.

"The US equity markets opened 2012 on a strong note, and bonds were dragged down in the process. We maintain that the disconnect between yields and fundamentals is wide - something has to give," said George Goncalves, head of US interest rates strategy at Nomura Securities International in New York.

"The coiling lower in yields into year-end was driven by low volume and the fear-trade, but that may not last. However, first quarter could be driven by a reversal of headline risks that would then unleash rates higher to our first target of 2.4 percent on 10-year US Treasuries," Goncalves said.

Indeed, more market players seemed to be looking for yields to move higher.

The share of investors who said on Tuesday they were short, or owning less Treasuries than their portfolio benchmarks, rose to 23 percent from 15 percent the previous week, J.P. Morgan Securities said of its weekly Treasury client survey, released on Wednesday.

The survey moved to its shortest level since Aug. 5, J.P. Morgan said.

Most investors remain neutral on the outlook for Treasuries, however, with the share of neutrals dipping to 64 percent from 70 percent the week previous, according to the survey.

Investors are looking ahead to US payrolls data on Friday, with the median of forecasts from analysts polled by Reuters calling for employers to have added 150,000 jobs in December, up from 120,000 new jobs in November.

The ADP National Employment Report, which chronicles the pace of job growth in the private sector, will be released on Thursday. Normally the ADP report is released on Wednesdays, but it was pushed back this week because of the New Year's Day holiday.

Copyright Reuters, 2011