The euro zone bailout fund will provide loans to Greece, Ireland and Portugal at a lower interest rate and for longer maturities, under the draft seen by Reuters on Thursday.

"It's a little more positive coming out of the EU summit. Its just a little risk off for Treasuries," said Justin Lederer, interest rate strategist at Cantor Fitzgerald in New York.

Optimism from the European Union summit dominated trading in US government bonds on Thursday though investors are also looking for further signs that Washington lawmakers will reach a substantive agreement to reduce the country's ballooning deficit, and raise the debt ceiling.

President Barack Obama and top lawmakers face growing pressure on Thursday to speed up efforts to reach a deficit-reduction deal as an Aug. 2 deadline looms, when the country may face itself unable to pay its bills.

"I think the market will continue to be characterized by headlines about Europe and people trying to discern what the outcome is going to be with the debt ceiling," said Richard Bryant, head of Treasury trading at MF Global Holdings in New York.

Thirty-year bonds, which have the most to lose from a failure to bring down the deficit, underperformed for the second consecutive day, with the yield gap between 10-year notes and 30-year bonds expanding to 134 basis points, from 132 basis points on Wednesday.

The bonds were last down 28/32 in price to yield 4.31 percent, up from 4.25 percent late on Wednesday.

Benchmark 10-year notes fell 11/32 in price to yield 2.97 percent, up from 2.93 percent, and five-year notes dropped 4/32 in price to yield 1.50 percent, up from 1.48 percent.

Copyright Reuters, 2011