Treasuries rise as Wall St rally set to fade

Treasury futures climbed 8/32 to 129-31/32 as investors bought back into a cheapened market and stock futures signalled that Monday's rally in US equities -- exaggerated by low liquidity -- could see some retracement at the open.

"Yesterday (Treasuries) got to levels which have been enough to spark some real money interest," said Craig Collins, trader at Bank of Montreal in London. "Once we found the 2.30 (percent) support level, buying showed up and we haven't really had a down trade since."

The yield on 10-year Treasury notes was 3.4 basis points lower on the day at 2.23 percent while two-year yields fell 0.5 basis points to 0.2033 percent.

Markets will be closely watching the release of minutes from August's Federal Reserve policy meeting later in the day to gauge the range of opinions on the committee on the health of the US economy -- and thus the case for further stimulus.

"Any time (the committee) appears close to a resolution it seems that's a risk-on trade and any lack of clarity is a flight-to-quality bid. If the minutes show a chasm between Bernanke's thinking and that of the senators, that's probably equity negative and bond friendly," Collins said.

Ten-year Treasury yields remain vulnerable as investors stay on edge after an extremely volatile August and may still fall below 2 percent if one of the upcoming US data releases disappoints investors, says Tomoaki Shishido, an analyst at Nomura Securities.

"Whether the latest rebound in risk appetite is sustained hinges on Thursday's US manufacturing and Friday's US jobs data," Shishido said. "Despite risks, I don't think that the economy is in as bad a shape as some fear and I think 10-year yields may pop above 2.5 percent within the next 3-6 months."

Copyright Reuters, 2011