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Major govt bond yields mostly higher

LONDON: Major government bond yields were mostly higher on Thursday under the weight of new supply and a reversal of the recent sharp gains in long-term U.S. and German bonds, analysts said.

Dealers said the focus for the market was the third and final leg of the Treasury refunding with $10 billion of 30-year Treasury bonds on offer.

"It's just unwinding a lot of the optimism that's factored into the long end of the curve as a consequence of the U.S. buyback announcement. Larry Summers comments wrought an awful lot of damage," said David Brown, chief European economist with Bear Stearns International.

"There's also a lot of supply indigestion being felt in the market today," he added.

U.S. and European 30-year bonds were both weaker after U.S. Treasury Secretary Lawrence Summers said on Wednesday the administration would continue to use the entire spectrum of the yield curve in managing a decreasing supply of government debt.

By 1730 GMT the 30-year long bond had negated a firm start to European trade, falling 15/32 to 97-00 pushing the yield 3.6 basis points higher to 6.351 percent. This lagged 10-year Treasury notes with yields rising 1.7 percent to 6.599 percent.

Euro denomominated government bonds were in negative territory throughout the session and fell to session lows after a key area of technical support gave way on the benchmark futures contract.

The benchmark March Bund future price was down 0.68 to 102.74 after earlier breaking key support of 102.97 and falling to a low of 102.69.

"It's a bit of technical shenanigans ahead of what will be a U.S. orientated move," said Tim Williams, fixed-income and market intelligence analyst, at IDEAglobal.com

Along the euro cash curve, short-dated paper outperformed the longer maturities on Thursday.

The benchmark 10-year Bund yield was up 8.7 basis points to 5.60 percent while the two-year Bund yield fell 0.5 basis points to 4.435 percent.

Analysts said the temporary steepening of the euro yield curve was mainly down to U.S. supply considerations.

British government bonds (gilts) settled lower with falls attributed to a weaker euro government bonds rather than the Bank of England's decsion to raise rates by 25 basis points to 6.0 percent, as expected.

"The Bank of England was a bit of a sideshow for the market as it was fully priced in," said Williams.

He said the market is now pricing in another 25 basis point hike by June.

Austrian government bonds underperformed the rest of the euro zone after currency market rumours circulated that Austria may be forced out of the euro because of the right-wing Freedom party's presence in government.

The European Commission swiftly denied this but the 10-year Austria/Germany bond spread widened three basis points to 30 b.p. on the news, equal to Portugal, the highest yielding euro zone member.-Reuters