By Min Zeng Of DOW JONES NEWSWIRES
NEW YORK (Dow Jones)--Major government bonds, including Treasurys, German bunds and U.K. gilts fell on Wednesday as concern over the euro zone's debt crisis eased, luring many investors into European and U.S. stocks.
A strong $21 billion 10-year Treasury note sale helped the U.S. government bond market recoup a large part of the losses, but investors are still bracing for a $13 billion 30-year bond auction due Thursday afternoon.
Yields on government bonds in many fiscally stressed euro-zone nations, including Spain, Portugal and Greece, dropped after Portugal sold its first bonds of the year even as it continues to pay a hefty borrowing cost. The euro rallied against the dollar.
Another relief came from reports that the European Union is mulling more supportive measures to prevent the sovereign-debt crisis from spreading to larger economies, including lowering interest rates for rescue loans and expanding the amount of the bailout facility established after last May's Greek debt crisis.
European "risky assets are up fairly significantly, and that is putting pressure on Treasury yields as the market interprets that as a sign the most recent stress may be passing," said Christian Cooper, head of U.S. dollar derivatives trading at Jefferies & Co. in New York.
In late-afternoon trade, the benchmark 10-year note was 8/32 lower to yield 3.373%. Bond yields move inversely to their prices. The 30-year bond was 26/32 lower to yield 4.538%, and the two-year note was 1/32 lower to yield 0.605%.
German bunds were the biggest losers in the major government debt markets. The 10-year German bond's yield jumped by about 11 basis points to 3.037%.
German Chancellor Angela Merkel said after a meeting with Italian Prime Minister Silvio Berlusconi on Wednesday that Germany and Italy agree on the need to strengthen political coordination to stabilize the euro. China central bank Deputy Gov. Yi Gang also signaled that the Asian economic powerhouse supports measures to stabilize the euro-zone's debt markets, noting that China is a long-term investor in Europe.
Some market participants cautioned that the relief in the euro zone could be short-lived. The next test comes Thursday as both Spain and Italy are scheduled to sell debt.
Speculation had risen in recent sessions that Portugal could be next in line to seek aid from the EU and the International Monetary Fund, following Ireland and Greece, even as officials from Portugal have insisted that they don't need a bailout.
Some market participants fear the crisis may spread to larger economies such as Spain and Italy, which would undermine the region's economy and derail growth in other countries.
"There is no 'silver bullet' for the euro zone," said Steven Major, global head of fixed-income research at HSBC Bank in London. "It is more likely that there will be a muddling-through scenario."
Higher yields lured buyers to the 10-year note sale, with a measure of overall demand rising to the highest level since April 2010. The indirect bid--a proxy for demand from foreign buyers including central banks--was 54%, compared with the average of 45.9% for the past eight auctions.
"The was a very decent auction. The rise in yield really helped," said James Newman, head of U.S. government and agency trading in New York at Keefe, Bruyette & Woods Inc.
John Briggs, U.S. interest-rate strategist at RBS Securities in Stamford, Conn., said the strong demand bodes well for the 30-year sale. He said valuations of the bonds "are near important supports and there has been good secondary-market interest from real money since the beginning of the year."
Wednesday afternoon, the Federal Reserve released the sizes of Treasurys it intends to buy in the coming weeks--approximately $112 billion in total. That includes $80 billion as part of the $600 billion bond-purchase program announced in early November and $32 billion in purchases associated with principal payments from agency debt and agency mortgage-backed securities expected to be received between mid-January and mid-February.
Meanwhile, the Fed said Wednesday in its latest economic survey that the U.S. economy gained muscle at the end of 2010 but remains so weak that inflation pressures are muted and the jobs market still soft.
US Swap Spreads Tighten
U.S. two-year swap spread, which measures the differential between the two-year swap rate and two-year Treasury yield and a main gauge of credit risks, was 1.75 basis points tighter at 23.25 basis points. The 10-year swap spread was 0.5 basis point tighter at 6.75 basis points.
COUPON ISSUE PRICE CHANGE YIELD CHANGE 5/8% 2-year 100 1/32 dn 1/32 0.605% +1.6BP 3/4% 3-Year 99 28/32 dn 2/32 1.045% +2.0BP 2 1/8% 5-year 100 21/32 dn 4/32 1.984% +2.5BP 2 1/4% 7-Year 100 8/32 dn 4/32 2.710% +1.9BP 2 5/8% 10-year 93 25/32 dn 8/32 3.373% +3.3BP 4 1/4% 30-year 95 10/32 dn 26/32 4.538% +5.1BP 2-10-Yr Yield Spread: +277 BPS Vs + 275 BPS Source: Tradeweb
-By Min Zeng, Dow Jones Newswires; 212-416-2229; min.zeng@dowjones.com
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