U.S. Treasuries firm after French 'no', await data
By Anchalee Worrachate
LONDON, May 31 (Reuters) - U.S. Treasuries edged higher in
European trading on Tuesday, outperforming euro zone debt partly
on the back of a flight to safety following France's "no" vote
in its European Union constitution referendum.
France sent a shockwave through Europe after its voters
rejected the treaty on Sunday by a wide majority. The
Netherlands is also expected to vote "no" to the constitution on
a referendum on Wednesday.
The market was also underpinned by month-end demand, but
trading volumes were thin as some investors were reluctant to
participate ahead of key data this week which include non-farm
payrolls on Friday, traders said.
"We've seen some switching out of Europe into the U.S. after
the 'no' vote in France, especially in the 10-year area," said a
trader at a U.S. bank in London.
"It looks pretty much like a flight to quality given
uncertainty in Europe," he said.
At 0900 GMT, the two-year notes price was up 2/32, with
yields at 3.62 percent <US2YT=RR>.
The 10-year note <US10YT=RR> was up 8/32, pushing the yield
down by three basis points to 4.05 percent.
Five-year yields <US5YT=RR> were at 3.78 percent. Meanwhile,
the ultra-long 30-year debt yield <US30YT=RR> was at 4.35.
Treasuries outperformed Bunds, with the 10-year yield spread
tightening to 77 basis points from 78 in the previous session.
On the data front, the Conference Board's consumer
confidence report and the Chicago Purchasing Managers' Index,
both for May, will be published at 1400 GMT.
Ten-year yields hovered around their three-month lows as
concerns over the credit market and the U.S. economic outlook
gave bond bulls incentives to buy bonds. The yield curve has
flattened and some took that as a sign that economic activity
will be slowing.
But the 4.0 percent level seems to be clear resistance for
the 10-year U.S. benchmark as some investors find it difficult
to push yields lower while the Fed has made it clear they are
not done with raising rates.
"Some people are worried that the curve is flattening and it
might soon invert...a trend that normally happens prior to
recession. But I don't want the market to be alarmed by the
flattening which we typically see at the middle of a U.S.
business cycle," said Jan Loeys at JP Morgans.
"Given where we think the economy is, we still believe the
Fed will keep raising interest rates. It's hard for me to see
yield curve inverting."
The June T-note future <TYM5> was at 112-29/32.
The 10-year dollar swap spread stood at 39.75 basis points,
compared with 42.00 basis points in the United States in the
previous session.
