Treasurys ease on signs of Europe-debt progress

SAN FRANCISCO (MarketWatch) � Benchmark 10-year Treasury prices fell on Monday, pushing yields up from record lows, amid reports that Germany eased its opposition to some proposed solutions to ease Europe�s debt crisis.

By the close of U.S. equity markets, yields on 10-year notes 10_YEAR , which move inversely to prices, rose 7 basis points to 1.53%. Earlier in the session, they had briefly retouched their all-time low of 1.44%. A basis point is one-hundredth of a percentage point.

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Yields on 30-year bonds 30_YEAR �increased nearly 5 basis points to 2.57%, after setting a record low last week.

Five-year yields 5_YEAR �added nearly 6 basis points to 0.68%.

�There�s kind of a slow move higher after some sticker shock from low yields on Friday,� said Guy LeBas, a fixed-income strategist at Janney Montgomery Scott.

LeBas also attributed higher yields to automated trading programs from hedge funds coming into play after Friday�s dip in yields.

The more than 40-basis point drop in the 10-year Treasury in May was �huge,� according to Anthony Valeri, fixed income investment strategist at LPL Financial, and set up for a bounce back in yields.

�Simply put, we�ve had an impressive run in Treasurys over a short period of time,� Valeri said. �From a technical perspective, they�re overbought.�

Valeri also said the market is probably jumping the gun on chatter about a new round of quantitative easing from the Federal Reserve this summer following a recent rash of lackluster U.S. economic data.

The rebound in yields followed a Wall Street Journal report late Sunday that Germany signaled it might be open to issuing euro-zone bonds or further supporting the region�s banking sector if countries in the euro-zone agree to transfer more fiscal control to a European authority.

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The resistance of Germany to more aid or programs that rely on its economic strength has been a major roadblock to resolving the region�s sovereign-debt and banking crisis. See more on Germany.

More near-term than the olive branch of fiscal union or potential euro bonds, traders will see what comes out of this week�s European Central Bank meeting, as well as Greece�s election, a Federal Reserve meeting and a European Union summit coming this month.

�We see no fundamental shift at this point and would not look for a definitive deal to be announced this week,� said Richard Gilhooly, U.S. director of interest-rate strategy at TD Securities. �The Greek elections on June 17 could be a more significant turning point, if the Greek people vote for the euro ahead of the EU Summit on June 28-29.�

U.S. economic outlook

On Friday, the focus was on the U.S. economy following a much weaker-than-expected employment report for May, pushing Treasury yields to record lows.

Some analysts said the data could persuade the Fed to extend its current bond-purchase program or opt to buy even more bonds, so it�s hard to point to Monday�s backup in yields in thin volume as indicative of the market�s outlook. �We don�t have confidence in suggesting that this backup reflects that Friday was a big capitulation day and we�re up for a retracement,� said David Ader and Ian Lyngen, bond strategists at CRT Capital Group.

With Treasury yields in uncharted territory, traders may be hedging more of their positions or reducing exposure to a move up or down in yields, according to RBS Securities analysts. Just last week, several investors said they saw 1.5% as the low in 10-year yields, only to see that broken through after the payrolls report.

�Whether a sailor or a pilot, uncharted waters/skies often dictate a slow-go approach among those tasked to ply such waters or fly in such skies,� Bill O�Donnell, head of Treasury strategy at RBS, wrote in a note. �Many experienced pilots and sailors would never venture into the unknown, preferring instead to leave such ventures to others.�

As for carving out some kind of trading range, he noted that 10-year yields face resistance getting below 1.45%, and if they break that level, it�s 1.36%. Bonds may see technical support if yields rise to 1.67%.

For 30-year bonds, the first resistance level is 2.5%, for which support may be seen at 2.78%, O�Donnell said.