US Treasuries tumbled in heavy trade on Friday, slamming the brakes on a safe-haven rally as Italy took measures to halt the spread of Europe's debt crisis. Long bonds followed their best day since March 2009 with the worst sell-off in nearly a year in a slide that started after a US jobs report dispelled investors' worst fears over the sputtering US economy.
--- Bonds reverse some of week's huge rally
--- Treasury to sell $72 billion in notes and bonds
The drop accelerated on hopes for a new crisis plan by Italy, which culminated in Prime Minister Silvio Berlusconi's announcement that he would escalate austerity measures. Ultimately, investors were shunning Treasuries on expectations Berlusconi's steps would get the European Central Bank to buy Italian bonds. They hope this will stabilise eurozone debt and world financial markets after Thursday's fear frenzy.
"That was the real thing that got us started - that they will make some changes structurally to their economy or try to do some things to get their house in order, which may clear the way for the ECB to start buying some Italian bonds," said Rick Klingman, managing director of Treasury trading at BNP Paribas in New York.
The 30-year long bond fell more than 3 points on the day. They were last down 3-4/32, yielding 3.84 percent. Despite Friday's sell-off, long bonds were on track for their best week since the financial crisis days of December 2008. Figures from ICAP showed volumes were nearly double their average over the last 20 days at certain points during Friday's volatile session. However, trade in the futures market indicated that volumes were generally in line with the previous payrolls release date a month ago.
But this followed a whopper of a day on Thursday when long bonds posted their biggest rally since March 18, 2009, the day the Federal Reserve announced its first campaign of Treasuries buying after the financial crisis. Some 10.6 million interest rate contracts changed hands at CME Group Inc on Thursday, more than double the 4.3 million rate contracts that changed hands the same day a year earlier. In July CME handled an average 6.1 million rate contracts a day.
Thursday's rally came on a mad rush to safe havens after the ECB gave no signals it would be buying bonds issued by Italy, which along with Spain has become an increasing focus in Europe's debt crisis. Investors have suffered from growing fears that Europe's troubles would hurt a global economy that already appears vulnerable.
Earlier, sources close to the matter said the European Central Bank was demanding that Berlusconi commit to fast-track specific welfare reforms and a constitutional amendment enshrining a fiscal rule before it will buy Italian bonds. Investors therefore took Berlusconi's statement as a trigger to get out of safe-haven bonds. "It's expectation of the ECB buying Spanish and Italian debt," said James Combias, head of bond trading at Mizuho Securities in New York.
Though by no means stellar, news that US employers added 117,000 jobs in July was enough to calm investors' worst fears the economy was plunging headlong back into recession. Benchmark 10-year notes fell 1-13/32 in price to yield 2.56 percent. Seven-year notes also lost a point and were last trading down 1-3/32 to yield 1.91 percent. The Treasury will sell $72 billion in securities next week: $32 billion in three-year notes, $24 billion in 10-year notes, and $16 billion in 30-year bonds.
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