Longer-dated Treasuries dip

Longer-dated US Treasury debt prices fell for the fourth day in a row on Friday as investors turned less pessimistic about eurozone debt problems after promises of a comprehensive solution by the middle of next week. Trading was choppy and volume light, and losses were limited as few investors were willing to go into the weekend short safe-haven Treasuries given the uncertainty over Europe.
A summit of European Union leaders on Sunday is expected to begin to hammer out a plan to tackle the region's two-year-old debt crisis, with a second meeting of the leaders set for Wednesday. Prospects for the meetings, however, have been marred by divisions between France and Germany - the eurozone's two biggest economies - on the best way to strengthen the regional bailout fund. France and Germany said a wide-ranging plan would now be announced no later than Wednesday.
"The markets are experiencing spasmodic gyrations within increasingly well-defined ranges, driven by the hopes that a grand solution will be crafted, while willing to settle for any sign of concrete and credible progress," said Chris Ahrens, interest rate strategist at UBS in Stamford, Connecticut.
A more than 1 percent rise in stocks on Friday on optimism that a solution to the eurozone crisis would be agreed on further undermined Treasuries' safe-haven appeal. "All the markets are pointing to the same direction. It does seem to suggest that there's a greater degree of confidence that something is going to take place, be it at this weekend's summit or at Wednesday's meeting," said George Goncalves, head of US rates strategy at Nomura Securities in New York.
Benchmark 10-year notes traded 6/32 lower in price to yield 2.22 percent, up from 2.19 percent late Thursday and not far off the middle of a 2.294 percent to 2.077 percent range during the week. Although benchmark yields were headed for their first weekly dip in a month, yields remained on track for the biggest four-week rise since December 2010.
US 30-year bonds traded 25/32 lower in price to yield 3.26 percent, up from 3.21 percent late Thursday. Bonds were set for the biggest four-week rise in yield since late October/early November 2010. European policy makers are under tremendous pressure to deliver a response to the crisis that is both broad and deep - something that many strategists believe EU leaders will have a difficult time doing.
"We certainly do not want to condemn the plan before it has even appeared. But the omens are not particularly encouraging given the ongoing disagreements," said Jonathan Loynes, chief European economist at Capital Economics in London. "In short, we doubt the crisis ends here."
In the end, most market participants believe that there will be another risk-off move in the markets that will support Treasuries, with 10-year notes likely moving back to 2 percent or lower in the near term. Benchmark yields fell below 2 percent roughly a month ago as investors priced in a pessimistic global economic scenario.
Some fund managers believe European leaders will eventually come up with a plan for highly indebted eurozone countries at the summit meetings, which would be positive for risky trades in the short run and negative for Treasuries. But the details of that plan would likely entail slow economic growth in the region, which could spill over to other major economies in terms of fiscal austerity and continued risk aversion.