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Treasurys Ease as Earnings Show Banks Holding Ground

Reuters
Monday, 21 Jul 2008 | 1:24 PM ET

U.S. Treasury debt prices eased Monday as another big bank posted better-than-expected quarterly results, soothing worries about the financial sector and sapping any safe-haven bids for government debt.

Bank of Americareported better-than-forecast quarterly results. Last week, Citigroupreported a smaller-than-expected quarterly loss, while JPMorgan Chaseshowed a profit above Wall Street's expectations.

So far the bank results have bolstered the view that the financial sector is not on the brink of a complete breakdown.

"It looks like the financial meltdown will have to wait for another day," said Andrew Brenner, senior vice president at MF Global in New York.

Bond losses were limited, however, by flat to negative trade in stocks. The benchmark 10-year Treasury note was trading 3/32 lower in price for yield of 4.10 percent from 4.09 percent late Friday, while the 2-year note was trading 3/32 lower for a yield of 2.70 percent from 2.65 percent.

There was also some bearish sentiment on bonds Monday from pending supply, as the Treasury announced it will sell a record $31 billion of 2-year notes Wednesday and sell $21 billion of 5-year notes Thursday.

"The pending supply certainly is not helping bonds any," said Carley Garner, senior analyst at Alaron Trading in Los Vegas.

Bond prices fell last week on the better-than-expected bank results, and after mortgage finance giant Freddie Mac issued preliminary filings with the Securities and Exchange Commission, a step toward raising $5.5 billion in capital.

Investors have been concerned that Freddie Mac and rival Fannie Mae would need expansive amounts of capital to offset losses from delinquent borrowers and record foreclosures, and the SEC filing alleviated some of those fears and undermined bond prices.

But few analysts were ready to say that the worst was over with the U.S. credit crisis and problems in the housing market.

Still, some analysts saw more potential downside for Treasury prices.

"We have revised our rate views, and now anticipate that the U.S. yield curve will undergo higher yields and a steeper yield curve," Deutsche Bank economists said in a research report. Deutsche is forecasting the 10-year note yield will climb to 4.50 percent in the near term.

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