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Europe, Not Fed, Is Driving Treasurys: Analysts

The troubled periphery of the euro zone and the global economy will affect yields of US bonds more than the official end of the latest round of money-printing by the Federal Reserve, analysts told CNBC.

Treasury Building
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Treasury Building

June 30 marks the last day of the Fed's policy of buying Treasurys to inject liquidity in the markets to help interest rates stay low and Eric Wand, fixed income strategist at Lloyds Bank Corporate Markets, said there are no major surprises expected for bond yields as quantitative easing ends.

"It's probably just going to pass as it's been well flagged for some time and the markets are well discounted," Wand said.

"The main drivers of Treasury yields will be risk sentiment and the Greek situation and peripheral Europe going forward.

Yields would be higher if we didn't have this problem. But the US has its own problems with the deficit," he added.

Yields on Treasurys have been low since the second round of quantitative easing (QE2) began eight months ago but many analysts expect yields to stay close to the three percent mark, where they have hovered for a few weeks now.

"On the 10-year Treasury yield we are looking at yields around 3.25 percent by the end of the third quarter going into the last quarter of the year," Wand said.

"The market has had a consistent stream of worse than expected data but we expect better than expected numbers to come out in the coming months," he added.

This was echoed by Sharon Stark, head of fixed income strategy at Stern Agee's, who said the end of QE2 would have only a marginal effect on bond yields.

"I don't think a whole lot changes. You might see a slight increase but you'll find that central banks, foreign central banks and money funds will fill that void. Yields will probably be anchored close to where we are given the state of the economy," Stark said.

Further Falls in Yields?

Stark even expects some further small falls from the current level of yields.

Ben Bernanke, Federal reserve Chairman, spoke earlier this month following the last Federal Open Market Committee (FOMC) meeting and gave no hints as to whether he was contemplating any further stimulus.

The FOMC meets next on Aug. 9, after the deadline for raising the debt ceiling to avoid a technical default, which is Aug. 2, and analysts and the markets will be eager to hear what - if anything - in terms of further monetary stimulus will be offered.

Deeper economic weakness could see some form of QE3 stimulus even if it does not result in actual money printing, Nick Beecroft, senior markets consultant at Saxo Bank told CNBC.com.

"If there's no change to employment or if core inflation begins to creep up then Bernanke would be more than happy to introduce QE3 but a politically sanitized version, not actually printing money," Beecroft said.

"Over the short term for the rest of the year I expect yields to stay in the 3.25 percent to 2.5 percent range," he added.

Treasurys maintained their "flight to safety" status because uncertainty remains in the economy as this round of monetary stimulus ends, according to Beecroft.

"We have known for months that QE2 was going to end and so there has been this reduction in yields that we have been seeing as there has been a move out of riskier assets into safer assets," Beecroft told CNBC.com.

Sovereign debt perceived as safe and that of multinationals will still be sought by investors, Wand said.

"Negativity goes on and so higher grade fixed income remains attractive.

Aside from high grade sovereign debt corporate debt - the largest multinationals – are very cash rich so that is also attractive to investors," he added.

The yield on the 10-year note ended Wednesday's trading session at 3.11 percent, its highest since May 25.

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