US government bond prices fell on Monday as investors returned to riskier assets amid expectations the Greek parliament would pass an austerity plan that would allow Greece to roll over its debt. As demand for safe-haven US debt abated, at least for the moment, global stocks advanced and the euro bounced back against the dollar. On Wall Street, major stock indexes finished higher.
In contrast, benchmark 10-year Treasury notes fell 16/32, their yields rising to 2.93 percent from 2.87 percent on Friday. The 30-year bond fell 1-20/32, its yield rising to 4.29 percent from 4.19 percent. Several analysts said the retreat in US government debt prices was due to an unwinding of safe-haven purchases made before the weekend in the event any "financial contagion" developments emerged from Europe.
"Going into the weekend, investors bought Treasuries as a hedge against unexpected bad news out of Europe," said Gary Thayer, chief macro strategist at Wells Fargo Advisors in St. Louis. "When no new bad news came out, some of the safety bid came out of Treasuries." Greece's parliament will begin debating a 28 billion euro ($40 billion) package of measures to increase taxes and cut fiscal spending that is critical to winning a new round of international funding to keep it afloat.
Early weakness in Treasuries was exacerbated by lacklustre customer interest in $35 billion of 2-year Treasury notes the government sold in the first of three note auctions this week. "It was a relatively weak auction, almost certainly because two-year rates are within shouting distance of the all-time rate lows set in November 2010," RBS head of Treasury strategy William O'Donnell said in a note to clients.
The absence of enthusiasm, at least for a day, for two-year notes yielding less than half a percent was apparent in the ratio of bids offered over those accepted, at 3.08 versus 3.18, on average, in the previous four two-year note sales, said Ian Lyngen, US government bond strategist at CRT Capital. "Treasuries traded weaker leading into the auction, with the two-year sector building in a modest concession, both outright and on the curve versus 10-year notes," he said.
Two-year notes were down 4/32 on Monday afternoon, their yields on track for their biggest daily rise in nearly three months, up to 0.40 percent from 0.34 percent late Friday. The context for that rise, however, is that two-year yields are set for their biggest quarterly drop since the fourth quarter of 2008, reflecting investors' appetite for safety.
News that US consumer spending was unchanged in May for the first time in almost a year was constructive for Treasuries. But it appeared to be balanced by news of a build-up in underlying inflation pressures. Some participants said the market was starting to pay more attention to the apparent political impasse over raising the $14.3 trillion US legal borrowing limit.
Richard Gilhooly, interest-rate strategist at TD Securities in New York, said a June 16 note from ratings agency Standard & Poor's, which quantified the cost to investors of a potential US debt downgrade, seemed more relevant given the breakdown of debt talks late last week in Washington.
S&P put the cost of a US downgrade at $100 billion. But analysts have also said nervousness about a debt ceiling impasse would likely hurt riskier assets first, and that ironic as it might seem, brinkmanship over the US debt ceiling might spur a flight to safety - in US government debt.