U.S. Treasurys yields surged to their highest in three weeks on Friday after data showed European banks are repaying more emergency loans than expected, suggesting the region is healing and reducing demand for safe-haven debt.
The European Central Bank said that 278 banks will repay 137.2 billion euros ($183 billion) in 3-year loans next week, out of 1 trillion euros that the ECB lent in twin operations in December 2011 and February 2012.
The news sent German government debt rates higher and U.S. government debt yields followed.
"Banks returned more of the LTRO money than was expected, so the 'risk on' move that we've seen for most of January has accelerated," said Rick Klingman, managing director in Treasurys trading at BNP Paribas in New York.
The news pushed yields on U.S. two-year government notes below the yields on two-year German government debt or Schatz for the first time in 13 months.
Demand for Treasurys also ebbed after a survey showed that German business morale improved for a third consecutive month in January to its highest in more than half a year, indicating that Europe's largest economy is gathering speed again.
Benchmark 10-year notes fell 26/32 in price to yield 1.95, the highest since Jan 4. The debt tested technical resistance at yields of 1.80 percent on Thursday for the third time this month, but failed to break below the level, which added weakness to the market.
"Given that, and the move to higher rates in Europe, we're seeing some profit taking and people exiting long positions," said Klingman.
Thirty-year bonds dropped 1-20/32 in price to yield 3.14 percent, also the highest since Jan 4.
Widely-held long positions by traders that are holding Treasurys in anticipation of month-end extension buying may have added to the move, as they needed to reduce or cover these positions.
"A lot of tactical guys are sitting long for month-end extensions, with everyone on the long side you get an exacerbated move," said Joseph Leary, a Treasurys trader at Citigroup in New York.
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New supply scheduled for next week also weighed on the bonds. The Treasury will sell $99 billion in new debt including $35 billion in two-year notes on Monday, $35 billion in five-year notes on Tuesday and $29 billion in seven-year notes on Wednesday.
"That's part of the reason we're trading heavy as well, after a two week period of no supply we're returning to an auction cycle again next week," said BNP's Klingman.
Minutes from the Federal Reserve's January meeting will be released next Wednesday and will be scrutinized for signs over whether the central bank is likely to end its latest bond purchase program this year.
Minutes from the Fed's December meeting, released on Jan. 3, showed that some Fed voting members opposed continuing bond buybacks, sparking speculation that the central bank may end its latest round of quantitative easing before year-end.
"The FOMC could be a wildcard, they will probably clarify how easy they expect to be. The big move that you have to look out for is the belly of the curve," said Citi's Leary.
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The Fed bought $3.71 billion in debt due in 2018 and 2019 on Friday, out of $15.60 submitted for purchase on Friday as part of this program.
Investors are also focused on next Friday's payrolls employment report for January, which is expected to show that employers added 155,000 jobs in the month, according to the median estimate of economists polled by Reuters.