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US Treasuries prices erased early gains on Friday as expectations that Spain would ask for help to recapitalize its banks over the weekend reduced fears over the euro zone breaking up and ebbed demand for the safe-haven debt. A late downgrade of Spain's credit rating by Fitch Ratings on Thursday sparked strong overnight demand for Treasuries, though demand ebbed during Friday's US session as investors looked ahead to the expected bailouts.
Traders are nervous that continuing instability in Spain, if not addressed in the near term, would reduce the likelihood that a pro-European party will succeed in elections scheduled in Greece on June 17 that may decide whether the country remains in the euro zone.
"The bonds come off the highs because this bailout will be done on the weekend. It has to be done on the weekend because it will have an impact on the outcome of the Greek election; they don't want to see instability in the week before," said Richard Gilhooly, an interest rate strategist at TD Securities in New York. Benchmark 10-year notes yields were last unchanged in price to yield 1.64 percent after trading as low as 1.56 percent.
Thirty-year bonds fell 15/32 in price to yield 2.76 percent, up from 2.65 percent. Two-year interest rate swap spreads, which are seen as a proxy for bank credit risk, also tightened by 0.75 basis point on the day to 30.75 basis points, the lowest level in around a month.
Investors were nonetheless cautious over the terms that will be attached to any Spanish bailout, with uncertainty over whether bank bond investors are likely to take large losses. Concerns that new stresses will emerge in the region are also expected to keep bond yields near their historic lows. The Treasury Department will sell $32 billion in new three-year notes and reopen a prior 10-year note issue by $21 billion and an older 30-year bond issue by $13 billion next week.

Copyright Reuters, 2012

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