TREASURIES-Belly of the curve gains as rate hike fears ease

* 30-yr bonds dip on inflation fears, ahead of auctions

* Benchmark 10-year notes test support at 3.56 percent

* Fitch sees longer-term threat to US credit-worthiness

By Chris Reese

NEW YORK, April 7 (Reuters) – Intermediate-dated U.S.
Treasuries rose in price on Thursday after European Central
Bank President Jean-Claude Trichet said the ECB’s decision to
raise benchmark interest rates would not necessarily be the
first in a series.

Longer-dated government debt eased, in a move that could
see some follow-through in coming days if benchmark yields
break through price support. Thirty-year bonds fell for a third
day in worries over rising inflation fueled by soaring oil
prices, and in the setup to next week’s debt auctions.

Treasuries were lent some safe-haven support by news of a
major aftershock in northeast Japan, where a tsunami warning
was issued. The warning was later lifted and no tsunami was
reported. For details see [ID:nL3E7F72Y2].

The ECB raised rates by a quarter of a percentage point to
1.25 percent, the first increase since the financial crisis in
2008. But Trichet said a series of hikes is not necessarily in
the cards. For details, see [ID:nECBNEWS]

“Trichet’s comments led the market to believe that a
further rate hike was not completely on the table, or at least
he did not indicate that this is the first in a string of many
(rate increases),” said Marty Mitchell, chief market technician
at Stifel Nicolaus in Baltimore.

Longer-dated Treasuries had sold off early in the day
heading into the Treasury’s announcement of the sizes of next
week’s debt auctions. They then pared some of those losses
after the Treasury said it would sell $66 billion of three-year
notes, reopened 10-year notes and reopened 30-year bonds, which
were expected. [ID:nWAL7FE75A]

“The curve flattened into the two-year, five-year and
seven-year auctions two weeks ago and now we are starting to
steepen into next week’s supply, which includes tens and
thirties,” Mitchell said.

Thirty-year Treasury bonds (US30YT=RR: Quote, Profile, Research) traded 15/32 lower
in price to yield 4.62 percent. The Treasury curve steepened,
with the gap between two-year note yields and 30-year bond
yields moving out to 383 basis points, marking its widest since
March 17, from 376 basis points on Wednesday.

Benchmark 10-year note yields (US10YT=RR: Quote, Profile, Research) last traded at
3.56 percent, little changed from Wednesday, after earlier
testing support in a band from around 3.56 percent to 3.60
percent.

Analysts say a significant break above these levels could
mean a further leg of weakening for the debt.

“If you don’t hold around these areas we will probably go
to 3.75 percent-to-3.80 percent fairly quickly,” said James
Combias, head of government bond trading at Mizuho Securities
in New York. “The issue is whether we are going to go into a
much higher yield range environment or if this is going to be
the bottom of the range,” he added.

Five-year notes (US5YT=RR: Quote, Profile, Research) traded 6/32 higher in price to
yield 2.28 percent, down from 2.32 percent late on Wednesday,
while seven-year notes (US7YT=RR: Quote, Profile, Research) rose 4/32 to yield 2.97
percent from 2.99 percent.

Meanwhile, fears over the impact of a possible government
shutdown weighed on Treasury debt. House Speaker John Boehner
said on Thursday talks with the White House over a spending
bill for this year are drifting further apart and that
substantive policy issues remain to be resolved.

Analysts at JPMorgan said a shutdown would likely be
negative for Treasuries, as it would illustrate the problems
members of Congress have in compromising. This may be
potentially a bigger issue if they are unable to resolve 2012
budget differences.

Fitch Ratings said in a statement that while a budget
agreement and an expansion of the debt ceiling are likely to
happen, longer-term concerns remain over U.S.
credit-worthiness.

“The brinkmanship over the debt ceiling and the 2011 budget
will be resolved — of greater threat to U.S. financial
stability and its ‘AAA’ status would be the failure to agree on
a credible medium-term fiscal consolidation strategy as
economic recovery becomes more secure,’ David Riley, head of
sovereign ratings at Fitch said in a statement.
(Additional reporting by Karen Brettell; Editing by Dan
Grebler)

TREASURIES-Belly of the curve gains as rate hike fears ease