NEW YORK: US Treasuries rose on Wednesday as the prospect of a longer-term Spanish debt auction made safe-haven US Treasuries a popular investment choice.
An auction of 12- and 18-month Spanish debt overnight was considered a success, but a more challenging longer-term debt sale looms.
Spain will sell two- and 10-year bonds on Thursday and investors see those sales as a better test of demand for the country's debt.
"The US Treasury market is looking for direction from the situation in the European periphery -- in particular at the upcoming auctions Spain," said Eric Stein, vice president and portfolio manager at Eaton Vance Investment Managers.
Spain sold short-term securities earlier, noted Jason Brady, portfolio manager and managing director at Thornburg Investments, with $73 billion in assets under management, in Santa Fe, New Mexico. "But the 10-year Spanish debt sale is a much bigger deal because those maturities are outside the window of the ECB's three-year lending operations," he said. "You'll get a more market-based result."
Brady said markets have many questions about the sustainability of Spain's budget since the country is in a recession.
"Unemployment in Spain is very high and also skewed toward younger folks having less opportunity," he said. "Bringing growth back to Spain is going to be hard; very hard. That would tend to support safe-haven Treasuries."
Bill Gross, manager of PIMCO, the world's largest bond fund, sounded dubious about the Spanish auction on CNBC on Tuesday in light of the European Central Bank's "unwillingness to continue to buy sovereign debt." He cited the absence of such purchases "really for a month to a month and a half." Gross runs the $252 billion PIMCO Total Return Fund.
Gross called the ECB's behavior a "tightening maneuver" and said recent comments from the Federal Reserve's Janet Yellen and New York Fed President William Dudley about the "problematic" nature of quantitative easing show that the United States is doing "the same thing."
The next big events the market will watch after the Spanish auctions are the World Bank/International Monetary fund meetings this weekend, Stein said.
"The broader risk markets and US Treasuries will look for announcements of any increase in the IMF's overall lending capacity or a more specific European 'firewall,'" he said.
US Treasury Secretary Timothy Geithner said on Wednesday it was important that debt-stricken European nations not make sharp and immediate budget cuts and tax increases, since that could undermine growth and chances for reform.
Spain is a case in point as spending cuts there would come at a time the country has an overall unemployment rate of 23.6 percent and a youth unemployment rate over 50 percent.
The second big event for the Treasury market will be the Federal Open Market Committee April 24-25 meeting on monetary policy next week, Stein said.
Investors will be watching Fed Chairman Ben Bernanke's post-meeting news conference for any clues as to whether the central bank will extend its "Operation Twist" stimulus program under which it sells short-term securities and buys longer-dated ones. The program is set to run through June.
"Next week's Fed meeting will be important to let us know whether or not QE (quantitative easing) is on the table," PIMCO's Gross told CNBC.
In morning trade, the benchmark 10-year Treasury yielded 1.99 percent, slightly lower than its 2 percent level late on Tuesday but within the 1.95-2.05 percent range it has moved in over the past week as mixed economic data vied with developments in the euro zone.
The 30-year bond yield was at 3.13 percent, easing from 3.14 percent late on Tuesday.
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