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Prices drop as equities rise, emerging market worries recede

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U.S. bonds fell on Monday, with some investors exiting the safe-haven asset class as Wall Street swung higher and worries dwindled about troubled developing economies such as Ukraine.

After muted price changes in overseas and early New York trading, benchmark 10-year U.S. Treasury notes were off 2/32 in price. That pushed the yield to 2.741 percent after going as high as 2.763 percent.

The thirty-year Treasury bond was down 2/32 of a point in price, taking the yield to 3.699 percent after a session top of 3.72 percent set about midday.

"With signs of progress in Argentina and Ukraine ... that causes people to leave Treasurys. There's less anxiety over emerging markets," said Patrick McCluskey, senior fixed income strategist at Wells Fargo Advisors.

Treasurys appear overvalued and are increasingly seen vulnerable to Federal Reserve policy changes and higher interest rates, McCluskey said. Wells Fargo forecasts that year's end yields will be 3.50 percent on 10-year Treasury notes and 4.50 percent on 30-year bonds, he said.

McCluskey also said Wall Street stocks, which rallied sharply on Monday and took some headline indices to fresh highs, were likely to see many ups and downs during 2014.

Overall, Treasury investors have had scant guidance for trading from U.S. economic data but may get some on Thursday, when Federal Reserve chief Janet Yellen appears before Congress, according to DRW Trading strategist Lou Brien in Chicago.

"We seem to be in a time when we are floating around with the flows," Brien said. "We have Yellen on Thursday and her testimony may be a little different ... and we have some interesting data on Friday."

Data due on Friday includes the pending homes sales index for January from the National Association of Realtors. A key indicator of the important U.S. real estate sector, the index was off 8.7 percent in December. A Reuters poll signals a 2 percent month-over-month rise for January.

Markets have mostly shrugged off weaker-than-expected U.S. economic reports because much of the nation was hit by rough winter weather that had slowed business and spending, according to TD Securities analyst Gennadiy Goldberg in New York.

"We largely expect this week's key data releases to be relatively soft," Goldberg said in a commentary. "We nevertheless look for markets to discount a large portion of the data weakness due to ongoing winter weather distortions."

Investors may be stung by likely downward revisions on Friday to fourth-quarter gross domestic product estimates, said Goldberg, who sees Treasury yields grinding higher in coming weeks.

Separately, the U.S. Treasury on Monday auctioned $50 billion of bills, composed of $25 billion of 3-month bills sold with a discount rate of 0.045 percent and $25 billion of 6-month bills at a discount rate of 0.075 percent.

—By Reuters

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