US Treasuries prices fell on Friday as Italian government bond yields eased and the European Central Bank intervened in markets to lean against the higher premiums investors have been demanding for European debt. The possibility the ECB might start lending funds to the IMF to help struggling eurozone countries, or that it might become a lender of last resort, a role it has thus far firmly resisted, encouraged investors to shoulder riskier assets at the expense of safe-haven US government debt.
The readiness, or lack thereof, of the ECB to function as a lender of last resort will be a dominant market theme in weeks to come. Many investors, analysts and policymakers believe the ECB must step in to play that role to save the euro. Benchmark 10-year Treasury notes fell 13/32 in price, their yields edging up to 2.01 percent from 1.97 percent on Thursday. "The 10-year note has been rotating around 2 percent lately," said Steve Van Order, fixed income strategist with Bethesda, Maryland-based Calvert Investment Management Inc, which has more than $14.5 billion in assets under management.
Stronger US economic data would tend to elbow Treasury yields higher, but what's prevented that from happening - and is likely to do so in the weeks ahead - "is waking up each day to some new development in Europe," Van Order said. Spain holds a parliamentary election this weekend and the centre-rightist People's Party appears to enjoy a wide lead over the ruling Socialists.
Italian and Spanish debt yields fell on Friday after the ECB intervention alleviated some pressure in those markets. Bond investors get a cornucopia of economic data ahead of next week's Thanksgiving Day holiday when US markets close. October home sales figures are due on Monday and the advance estimate of third-quarter gross domestic product growth is due on Tuesday; economists polled by Reuters estimate GDP grew 3.4 percent in the third quarter. October personal income and spending figures, durable goods orders, and new jobless claims figures for the latest week are all due on Wednesday, as are the minutes from the November 1-2 Federal Reserve monetary policy committee meeting.
The market will look at the Fed release to get a clearer sense of how seriously committee members would consider further easing of monetary policy to assist US economic growth. The market will also watch to see whether a special congressional committee will reach a deal on debt reduction by Wednesday's deadline.
If the committee, comprised of Republicans and Democrats divided by deep philosophical differences, does not reach a specific pact, $1.2 trillion in automatic budget cuts would take effect over a 10-year period, starting in January 2013. Financial markets do not really expect the congressional committee to come to an agreement, however, so the market impact of a failure to reach a deal should be limited. On Friday, two major stock indexes pressed higher, letting the bid for safe-haven US debt dwindle.
Benchmark 10-year Treasury yields have fallen from 2.40 percent at the end of last month as investors bought US debt as a reaction to debt problems in Europe. But some investors see 10-year US Treasuries yielding just 2 percent as too expensive, given the recent improvement in US economic data. The Treasury also plans to sell $99 billion in new 2-year, 5-year and 7-year notes next week, adding supply.
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