US Treasuries prices rose yesterday after bidding at an auction of Italian sovereign debt fell short of expectations, reviving safe haven demand for less risky government securities.
Investors were monitoring the results of last week's Eurozone debt auctions, in particular in Italy and Spain due to their heavy indebtedness and a surge in their borrowing costs in late 2011. They fear a score of weak auctions would exacerbate the ability of Eurozone's third and fourth biggest economies to refinance their debt as they struggle to pare spending.
Traders had anticipated strong demand for Italy's 4.75 billion of three-year notes offered yesterday following relative brisk bidding at Thursday's Spanish debt sale. But the Italian auction's bid-to-cover ratio of 1.22 was lower than expectations.
"Some people were looking for an outsize bid. It was a disappointing sale," said Chuck Retzky, director of futures sales at Mizuho Securities USA in Chicago.
Also fuelling the early bond market gains was an expected lower open on Wall Street stocks after US bank J.P. Morgan reported lower fourth-quarter profits on weaker trading and corporate deal-making due to the Eurozone debt crisis.
In early trading, benchmark 10-year Treasury notes were up 9/32 in price for a yield of 1.89 per cent, down 3 basis points from late Thursday.
The 10-year yield is poised to fall about 6 basis points on the week, closing well within the 1.80-2.15 per cent trading range established since last November.
The 30-year bond recovered from Thursday's weak $13 billion auction, the last leg of last week's $66 billion in coupon-bearing supply. It last traded up 19/32 for a yield of 2.94 per cent, down 3 basis points from Thursday.
The 30-year bond yield was on track to fall 6 basis points on the week after rising 12 basis points the previous week.
After the disappointing Italian debt sale, Treasuries underperformed German Bunds for a second day. Their 10-year yield premium over 10-year Bunds grew to nearly 10 basis points, the widest since last Thursday.
On the data front, the US trade gap widened to $47.75 billion in November, wider than the $45.00 billion expected by economists.
Thomson Reuters and the University of Michigan were to release their early January readings on US consumer sentiment yesterday morning. Despite some encouraging signs in the US economy in recent weeks, there are concerns that this year-end upward momentum would evaporate as seen in the previous two years.
"The worry is that consumers will go back into their shell in the first quarter," Mizuho's Retzky said.
Meanwhile, Federal Reserve Governor Elizabeth Duke was to speak about regulations and credit availability at mid-morning, while Richmond Fed President Jeffrey Lacker was to discuss his economic outlook after that.