By Cynthia Lin
Anxiety about Europe's debt crisis Thursday fired up interest in safe-harbor U.S. Treasurys, though prices ended off session highs as investors opted for the sidelines ahead of the U.S. employment report.
Spain grabbed most the attention overnight as investors worried about the country's ability to grow while the government cracks down on its finances to bring the deficit down. The nation is the fourth-largest economy in the bloc and ruffled up concerns after drawing less-than-enthusiastic demand for its bonds in an auction Wednesday.
"This is a warning and a wake-up call that the LTRO honeymoon is over," said RBS head Treasurys strategist William O'Donnell, referring to the European Central Bank's Long-Term Refinancing Operation program that allowed banks to access cheap three-year loans.
Fears about the broader European credit crisis eased after that program was announced late last year and optimism grew further after Greece completed its debt restructuring deal last month. But Spain's financial woes returned to the forefront this week, sending the nation's 10-year bond yields as high as 5.808% Thursday. That's the highest mark since December.
German bunds, considered the safe-harbor of its region, and U.S. government bonds were the beneficiaries of the broad flight-to-safety move. The spread between the yields on Spanish 10-year bonds and comparable German bunds blew out to more than four percentage points.
In late-afternoon trading, U.S. benchmark 10-year notes gained 19/32 in price to yield 2.173%. The 30-year bond rose 1 1/32 to yield 3.322%, while two-year notes rose a fraction in price to yield 0.345%. Debt prices move inversely to yields.
These gains are off the peak of the session, however, as investors gradually turned focus back to the U.S. and the looming non-farm payrolls report. Ahead of this report, investors typically avoid taking strong positions so as not to get caught on the wrong side of the trade. It happens to land on the Good Friday holiday this month, which analysts say will likely face amplified price reactions because of holiday-thinned trading activity.
The employment release is already a highly anticipated monthly read on the labor market, but is warranting extra attention now as investors adjust their expectations about future monetary policy.
Upbeat results will likely dent the prospect of the Federal Reserve introducing another bond-buying program. Inversely, disappointing results would revive hopes that the central bank will offer the economy more support.
Early Thursday, the U.S. reported an unexpected decline in the number of Americans filing for jobless benefits last week, bringing the total to a near-four-year low.
St. Louis regional Fed president James Bullard argued against making a conditional statement to keep monetary policy easy. He said the Fed's current rate timeline, which suggests the rate won't be raised until late-2014, may actually come off as an "unwarranted pessimistic signal."
US Swap Spreads Widen
The U.S. two-year swap spread, which measures the difference between the two-year swap rate and two-year Treasury yield and is a main gauge of credit risks, was 1.75 basis point wider at 29.50 basis points. The 10-year swap spread was 0.75 basis point wider at 10.75 basis points.
COUPON ISSUE PRICE CHANGE YIELD CHANGE
1/4% 2-year 99 26/32 up 0/32 0.345% -0.8BP
1/4% 3-Year 99 21/32 up 2/32 0.493% -2.7BP
7/8% 5-year 99 31/32 up 7/32 1.005% -4.7BP
1 1/4% 7-Year 99 20/32 up 14/32 1.557% -6.8BP
2% 10-year 98 15/32 up 19/32 2.173% -7.0BP
3 1/8% 30-year 99 9/32 up 1 1/32 3.322% -5.8BP
2-10-Yr Yield Spread: 182.1BPS v 187.9BPS
-By Cynthia Lin, Dow Jones Newswires; 212-416-4403; firstname.lastname@example.org