September 26, 2012 / 7:16 PM / 5 years ago

TREASURIES-Prices rise as euro zone fears resurface

By Karen Brettell
    NEW YORK, Sept 26 (Reuters) - U.S. government debt prices
rose on Wednesday as resurgent fears over Europe drove investors
to the safe-haven bonds, with worries flaring that Spain's
reluctance to ask for a full-blown bailout would prolong the
region's debt crisis.
    Longer-dated U.S. yields touched their lowest levels in more
than two weeks, more than erasing the spike earlier this month
in reaction to the Federal Reserve's announcement of a third
large-scale bond purchase program, nicknamed QE3.
    Fears over Europe helped the Treasury Department sell $35
billion of new five-year securities to strong demand, and raised
expectations for a $29 billion sale of seven-year notes on
Thursday, the last of this week's $99 billion in coupon-bearing
    "This is the first small crack we've seen in the EU bond
market since the beginning of August," said Jim Vogel, interest
rate strategist at FTN Financial in Memphis, Tennessee.
    The yield on 10-year Spanish debt rose to 6
percent on Wednesday, a threshold analysts consider
unsustainable. Spain's 10-year borrowing cost has been running
above 6 percent for much of the time since mid-May.
    With Spain's borrowing costs rising again and a key region
threatening to secede, Spanish Prime Minister Mariano Rajoy
hinted he was ready to request a rescue for the euro zone's
fourth-biggest economy. He told the Wall Street Journal on
Wednesday he would make the move if Spain's debt costs remained
too high for too long. 
    Previous stresses in the region have prompted euro zone
officials to give assuring statements in an effort to soothe
markets, and similar statements overnight may help markets
regain confidence, and ease demand for safe-haven bonds, if they
occur, said Vogel. 
    That said, "there is always a nice solid demand base for
seven-year notes based on the curve steepness and the Fed's
propensity to buy what is left over in the market," Vogel added.
    The Fed has been purchasing seven-year notes as part of its
Operation Twist program, which is designed to lower longer-term
    The five-year notes sold at a high yield of 0.647
percent on Wednesday, just below where the debt was trading
before the auction.
    Traders are pricing in expectations that the seven-year debt
will sell at yields of around 1.045 percent on Thursday
, just above the 1.026 percent level the notes
traded at in the secondary market.
    Statements from Philadelphia Fed President Charles Plosser
that he believes that QE3 will not do much to boost economic
growth or lower unemployment also added to doubts about how
effective the latest program will be, hurting risk assets
including stocks and helping bonds. 
    "The market is pleased with the liquidity provided by the
central banks, but it's skeptical about its impact on real
economic growth," said Gibson Smith, co-chief investment officer
of fixed income with Janus Capital Group in Denver. 
    U.S. government data also showed an unexpected dip in new
home sales in August, reducing optimism the housing recovery
gained traction. 
    U.S. benchmark 10-year Treasury notes were last
up 15/32 in price to yield 1.62 percent, down from 1.67 percent
late on Tuesday. 
    The 30-year bond rose 1-1/32 in price to yield
2.80 percent, down from 2.85 percent.

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