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TREASURIES-Yields rise as central bank hopes boost riskier assets
July 25, 2012 / 1:44 PM / 5 years ago

TREASURIES-Yields rise as central bank hopes boost riskier assets

 By Karen Brettell
 NEW YORK, July 25 (Reuters) - U.S. Treasuries yields rose on
Wednesday as increasing hopes that central banks globally will
act to stem slowing growth boosted demand for riskier assets,
and reduced demand for safe-haven bonds.
 Increased expectations that central banks will act has
helped boost risk assets including stocks in the past two days,
even as data globally points to a worsening economic slowdown.
 In the U.S. investors are watching for signs of further
stimulus from the Federal Reserve, where officials have already
started to think about new tools they can use beyond a possible
third round of quantitative easing to try to renew growth.
 "The market is caught between sinking global growth and
increased probability of further central bank action," said Guy
Haselmann, head of U.S. interest rate strategy at Bank of Nova
Scotia in New York.
 Demand for safe-haven bonds also ebbed on Wednesday after a
European Central Bank policymaker said there were reasons to
boost the firepower of the euro zone's new bailout fund to
tackle the region's deepening debt crisis.
 Governing Council member Ewald Nowotny said there were
arguments for giving Europe's permanent rescue fund a banking
license, which would allow it to borrow unlimited ECB money, an
idea that the central bank has rejected so far. 
 Treasuries also were hurt by weakness in German bunds, which
have been worsening since Moody's Investors Service on Monday
changed its outlook for Germany, the Netherlands and Luxembourg
to negative, from stable.
 The rating action added to concerns that the countries will
face higher costs from bailing out struggling countries in the
euro zone.
 U.S. bonds typically fall in concert with German government
debt, though in recent weeks Treasuries have benefited from an
outflow from even the safest euro zone countries.
 "U.S. Treasuries are gaining from the fight out of some of
the other safe havens," said Haselmann.
 The additional yield offered by 10-year Treasuries over
10-year German bunds has fallen to 12 basis points, from 30
basis points last Friday, before the Moody's action.
 Haselmann expects Treasuries yields should continue to fall
relative to German debt and drop below German bond yields. 
 "Given the liquidity premium, I would think we should trade
through bunds," he said.
 Meanwhile the Treasury is expected to see solid demand for a
$35 billion sale of new 5-year notes, the second sale of $99
billion in supply this week.
 U.S. Treasuries hit new record low yields on Tuesday after
the Treasury sold $35 billion in two-year notes at a record low
yield of 0.22 percent. The debt sold bid/cover ratio of 4 times,
the second highest demand on record.
 The Treasury will sell an additional $29 billion in
seven-year notes on Thursday.

 (Editing by Theodore d'Afflisio)

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