US Treasuries rallied on Monday as the optimism on Wall Street that followed last week's EU summit faded and investors began to worry again that a big-picture solution to the eurozone debt crisis was out of reach. Wall Street stocks fell, adding to Treasuries' safe-haven appeal, although a bout of new US debt supply over the next few days was expected to hold yields within recent ranges.
"People are still concerned about the ability of the Europeans to solve that never-ending crisis over there," said David Coard, head of fixed-income sales and trading at Williams Capital in New York. The first of seven debt sales scheduled this week and early next week saw strong demand: A $32 billion sale of three-year notes fetched a lower yield at auction than in the open market, signifying strong bidding.
Analysts at Nomura Securities attributed the aggressive bid to dealers covering short positions in a note to clients after the auction. Pessimism about the European situation could keep a strong bid going for Treasuries in the days to come. All the EU states except Britain agreed late last week to pursue stricter budget rules and a stronger fiscal union. But the capacity of the euro zone's bailout fund was capped, putting the onus on the European Central Bank to play a bigger crisis-fighting role. The ECB has repeatedly resisted doing this.
Ratings agency Standard & Poor's put more pressure on the eurozone on Monday, with its chief economist saying time was running out for the currency bloc to resolve its debt problems and that it might need another financial shock to get it moving. Jean-Michel Six, chief economist of the agency that shocked financial markets last week by putting 15 eurozone countries on watch for potential downgrade, said last week's EU summit agreement was a significant step forward, but not enough.
Moody's Investors Service also said on Monday it still expects to review its ratings on all European Union sovereign credit in the first quarter of next year, adding that last week's agreement by European policymakers offered few new measures to resolve the region's debt crisis.
US benchmark 10-year Treasury notes were trading 15/32 higher in price to yield 2.02 percent, down from 2.06 percent late Friday. Yields have held within a range of 1.87 percent to 2.17 percent since early November. Thirty-year bonds were 1-5/32 higher and yielding 3.05 percent, down from 3.11 percent late on Friday. The US Treasury is expected to sell $177 billion in seven auctions spread over only eight trading days. It sells $21 billion of 10-year paper on Tuesday and $13 billion of 30-year bonds on Wednesday.
Despite the definitive movement in Treasury prices, trading volume in the securities was low. CRT Capital estimated in a note to clients that Treasury trading volume was 62 percent of the 10-day moving average, with more trading in 10-year notes and 30-year bonds than in two-year notes.
The Federal Reserve will meet on Tuesday to discuss monetary policy, but is not expected to announce anything new in the way of stimulus programs or policies. The Fed has pledged to keep interest rates at the current ultra-low level near zero at least through mid-2013.
"We doubt that the Fed is going to announce a third round of quantitative easing (on Tuesday)," said Paul Ashworth, chief US economist at Capital Economics in Toronto, adding "we do anticipate that it will resume large-scale asset purchases in the first half of next year."