US Treasuries prices fell on Thursday after France and Spain held successful debt auctions and investors became less fearful of a euro zone calamity, reducing the demand for safe haven US debt.
Investors are becoming more hopeful cheap funds borrowed from the European Central Bank will be used to purchase euro zone debt and ease refunding pressures that risk renewed stress in the region.
Spain on Thursday sold 3 billion euros ($3.88 billion) in 10-year bonds, more than forecast and has now covered 19 percent of its funding needs for 2012. France also raised almost 9.5 billion euros in its first auction since Standard & Poor's cut the country from the top AAA.
"The better auctions in Europe and some confidence that they will come to some kind of private sector involvement agreement on Greek debt, which at least takes the imminent failure off of the table, are the two most important things" driving markets today, said Lou Brien, market strategist at DRW Trading in Chicago.
Greece and its bondholders are negotiating over a debt swap to avoid an involuntary default though the two sides have made little progress since resuming talks, said three sources close to the talks.
Nonetheless, benchmark 10-year notes dropped 21/32 in price with yields rising to 1.97 percent, up from 1.90 late on Wednesday, as the safety bid eased.
"Incrementally people are less worried about a more negative outcome in Europe," said Andrew Wilkinson, chief economic strategist at Miller Tabak & Co in New York.
Outside of Europe, markets are increasingly anticipating next week's Federal Reserve meeting where the US central bank will begin publishing interest rate forecasts for individual central bank officials.
Some analysts also expect the Fed may announce a new round of quantitative easing, this time focusing on mortgage-backed bonds, in spite of recent data that shows more economic momentum.
Miller Tabak's Wilkinson expects a program of around $1 trillion, just under the $1.25 trillion it bought in its first program that was announced in late 2008.
"The Fed has recently gone to great lengths to highlight the problems within the housing market that they state are plaguing the broad economic recovery," he said. "While we're looking at a general improvement in conditions including the stable inflation and declining unemployment, it simply isn't enough for the Fed."