US Treasuries are likely to continue to take direction from Europe, after a volatile week that saw Italy move to the centre of the crisis on increased fears that the country would need emergency aid. Treasuries prices eased on Thursday after an Italian debt auction went better than feared and the country moved closer to a national unity government. At a sale of 1-year treasury bills, Rome paid a 6.087 percent yield, the most in 14 years, but placed the full planned 5 billion euros.
Investors, however, remained on edge over the potential for renewed stress. The bond market is closed on Friday for the US Veterans day holiday. Volatility stemming from Europe also scared some investors away from a $16 billion auction of new 30-year bonds, leading the debt to price at around 5 basis points higher than it had traded before the sale.
"For the foreseeable future the market is going to trade on what goes on in Europe," said Justin Lederer, interest rate strategist at Cantor Fitzgerald in New York. Italy moved closer to a national unity government on Thursday, following Greece's lead where after five days of chaotic haggling former European Central bank vice-president Lucas Papademos was appointed to head an interim crisis cabinet. This is designed to help save Greece from default, bankruptcy and an exit from the euro zone.
Some investors see euro zone leaders as reacting too slowly to events and are seeking a stronger response including clarity that someone, such as the ECB, will step up as lender of last resort. "Right now the piecemeal approach isn't accomplishing anything other than spiking volatility," said Mitch Stapley, chief fixed income officer at Fifth Third Asset Management in Grand Rapids, Michigan.
"It's a very frustrating market to try to manage for the long term, when the long term is basically the next announcement" from Europe, he said. US bonds have undergone dramatic price swings on European headlines this week, which has scared away some investors and made it harder for dealers to set up for this week's auctions. Dealers typically sell bonds before the sale, driving down prices.
"There was a lot of caution going into the auction given that at any point in time the markets can reverse and go either way," said Cantor's Lederer. The Treasury sold $16 billion in 30-year bonds at a high yield of 3.20 percent. The long bond was last down 2-4/32 in price to yield 3.13 percent, up from 3.03 percent late on Wednesday. Benchmark 10-year Treasury notes fell 21/32 in price to yield 2.07 percent, up from 1.97 percent.