Thu May 27, 2010 12:06pm EDT
BONDS
* Yield rise may benefit 7-year notes sale
* U.S. Q1 GDP revised lower, weaker than expected (Adds analyst's quotes, updates prices)
By Chris Reese
NEW YORK, May 27 (Reuters) - U.S. Treasury debt prices fell on Thursday, with benchmark notes down more than a point as investors turned to riskier assets like stocks after China denied it was concerned about its exposure to the euro zone.
The appetite for risk rose after the Chinese central bank said Europe remains a key investment market for China's foreign exchange reserves, soothing earlier concerns over a report the Chinese were reviewing their euro-zone bond holdings.
Benchmark 10-year Treasury notes US10YT=RR were trading 1-2/32 lower in price, with their yield rising to 3.32 percent from 3.20 percent late on Wednesday. The yield, which moves inversely to prices, reached as high as 3.35 percent -- the loftiest level in a week.
"The catalyst was China's emphatic denial that they are considering switching out of the euro," said Andrew Brenner, managing director at Guggenheim Partners in New York.
Worries over contagion from the euro zone debt crisis have been a boon for Treasuries in recent weeks, with benchmark yields falling 69 basis points from an 18-month high of 4.01 percent reached in early April.
With Thursday's price drop, yields were on track for the largest single-day rise in over two months.
"Treasuries have been the beneficiaries of a massive safe-haven bid in recent weeks, and the markets were due for a correction," John Canavan, analyst at Stone & McCarthy Research Associates in Princeton, New Jersey, said of Thursday's price fall.
Thirty-year bonds US30YT=RR fell 2 points in price to yield 4.21 percent from 4.10 percent late Wednesday.
While strength in equities dictated the lower prices in Treasuries, traders were also pushing to cheapen bonds ahead of the auction of $31 billion of seven-year debt on Thursday afternoon.
Seven-year notes US7YT=RR were trading 29/32 lower in price to yield 2.80 percent, up from 2.66 percent late on Wednesday, and some analysts said the jump in yields could boost demand for the seven-year notes in Thursday's sale.
"On the whole, the sell-off should be a plus on the margins," Canavan said.
Treasuries briefly pared losses early on Thursday after the U.S. government's estimate of first-quarter economic growth came in below expectations. Gross domestic product expanded at a 3.0 percent annual rate in the first quarter, below the 3.2 percent pace initially estimated by the U.S. Commerce Department last month. For details see [ID:nN27259780].
"It's disappointing because everyone had expected an upward revision. That didn't come to fruition. This tells you that people were not as happy last quarter as we had thought," said Craig Thomas, senior economist at PNC Financial Services in Pittsburgh.
Two-year Treasury notes US2YT=RR were trading 4/32 lower in price to yield 0.88 percent, up from 0.82 percent late on Wednesday. (Additional reporting by Richard Leong; Editing by Andrea Ricci)
From Reuters