By Deborah Levine, MarketWatch
NEW YORK (MarketWatch) — Benchmark 10-year Treasury prices declined slightly on Thursday, while other maturities edged higher, as investors try to balance worries about Spain, Italy and Greece with rising expectations that the Federal Reserve will employ some bond purchase program to stem the slowdown in the U.S. economy.
Yields on 10-year notes 10_YEAR +1.13% , which move inversely to prices, rose 1 basis point to 1.61%. A basis point is one one-hundredth of a percentage point.
Yields on 30-year bonds 30_YEAR +0.15% decreased 2 basis points to 2.71%.
Five-year note yields 5_YEAR +1.13% erased a rise to trade at 0.71%.
The key event keeping markets in a tight range remains the Greek elections on Sunday.
“Traders and investors are not putting a lot of capital at risk here, days before the Greek elections - a binary event that is wholly unpredictable,” said bond strategists at RBS Securities. “In other words, investors are close to home and exposures are not large.”
Bonds briefly erased the decline after a report showed first-time U.S. jobless claims rose more than expected in the latest week, to 386,000. See story on jobless claims.
Separate data said consumer prices dropped in May, but rose 0.2% excluding food and energy – roughly in-line with forecasts. Read more on inflation.
The data could be seen as additional evidence that the U.S. recovery is losing traction and inflation isn’t a threat, giving the Fed room to ease policy more. The option gaining traction would entail the Fed extending its current program (known as Operation Twist) of buying longer-dated securities from the market and selling a roughly equal amount of its short-term holdings.
The Fed’s policy-setting Federal Open Market Committee next meets on June 19-20.
Italy, Greece
In a closely-watched auction, Italy was able to sell as much debt as it needed but at very high borrowing costs. Some analysts called them unsustainable, increasing the risk that Italy -- one of the largest economies in Europe and largest debt markets in the world -- may need to seek an international bailout soon. Read story on Italy’s bond auction.
Traders are also paring positions ahead of Greece’s elections on Sunday. It’s very unclear whether the country will favor a pro-bailout party and maintain austerity measures, or pick a party that will try to renegotiate the deal, dramatically raising uncertainty and the risk that Greece moves towards exiting the euro.
“Even if we manage to get by Greece on Sunday, we still have the problem of Spain and the potential spread of contagion to Italy, and a Fed grappling not only with European headwinds but slowing domestic growth,” RBS strategists wrote in a note. “Given all this, it’s hard to see yields heading much higher outside recent ranges, and I’d expect backups to continue to be well supported from now until at least the June 20th Fed meeting.”
Coming up at 1 p.m. Eastern time is the U.S. government’s sale of 30-year bonds, the last of three major auctions this week.
Bonds rallied Wednesday after sale of 10-year notes drew very strong demand from a key group of bidders, which could have been due to expectations for more Twist from the Fed, which may entail buying that maturity. Read about 10-year auction, Operation Twist.
“The 30-year auction on Thursday would likely be a referendum of market expectations for Twist extension at the June FOMC meeting,” said bond strategists at Nomura Securities.
Deborah Levine is a MarketWatch reporter, based in New York.
