TREASURIES-Bonds erase price gains as Spanish bailout eyed
By Karen Brettell NEW YORK, June 8 (Reuters) - U.S. Treasuries prices erased early gains o n F riday as expectations that Spain would ask for help to recapitalize its banks over the weekend reduced fears over the Euro zone breaking up and ebbed demand for the safe-haven debt. A late downgrade of Spain's credit rating by Fitch Ratings on Thursday sparked strong overnight demand for Treasuries, though demand ebbed during Friday's U.S. session as investors looked ahead to the expected bailouts. Traders are nervous that continuing instability in Spain, if not addressed in the near term, would reduce the likelihood that a pro-European party will succeed in elections scheduled in Greece on June 17 that may decide whether the country remains in the euro zone. "The bonds come off the highs because this bailout will be done on the weekend. It has to be done on the weekend because it will have an impact on the outcome of the Greek election; they don't want to see instability in the week before," said Richard Gilhooly, an interest rate strategist at TD Securities in New York. Benchmark 10-year notes yields were last unchanged in price to yield 1.64 percent after trading as low as 1.56 percent. Thirty-year bonds fell 15/32 in price to yield 2.76 percent, up from 2.65 percent. Two-year interest rate swap spreads, which are seen as a proxy for bank credit risk, also tightened by 0.75 basis point on the day to 30.75 basis points, the lowest level in around a month. Investors were nonetheless cautious over the terms that will be attached to any Spanish bailout, with uncertainty over whether bank bond investors are likely to take large losses. Concerns that new stresses will emerge in the region are also expected to keep bond yields near their historic lows. "Spain is going to ask for help for its banks, but without a plan going forward, people start to worry about contagion so they try to protect their wealth by buying Treasuries," said Matthew Duch, vice president and portfolio manager at Calvert Investment Management, based in Bethesda, Maryland, with over $12 billion in assets under management. Investors are also focused on the U.S. Federal Reserve policy meeting scheduled for June 19-20, where Chairman Ben Bernanke is expected to indicate whether the bank will launch a new bond purchase program in a bid to lower mortgage rates further and stimulate the economy. Bernanke said on Thursday that the U.S. central bank was ready to shield the economy if financial troubles intensified, but offered few hints that further monetary stimulus was imminent. He told a congressional committee the Fed was closely monitoring "significant risks" to the economy from Europe's debt and banking crisis. The Treasury Department will sell $32 billion in new three-year notes and reopen a prior 10-year note issue by $21 billion and an older 30-year bond issue by $13 billion next week.
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