U.S. bonds down as QE3 timing reassessed

NEW YORK (Reuters) - U.S. Treasury debt prices fell on Thursday as some investors pushed back the timing of another potential round of easing by the Federal Reserve and riskier assets did better at the expense of safe-haven U.S. debt.

"The genesis of the selling occurred yesterday when (Federal Reserve Chairman Ben) Bernanke's Congressional testimony left the impression that the Fed was not ready to give you QE3 sooner rather than later," said Kevin Flanagan, executive director and fixed-income strategist at Morgan Stanley, referring to a potential third round of unconventional, or quantitative easing.

And Bernanke's question and answer session with the Senate Banking Committee on Thursday did not correct that impression.

"There's a reassessment of where the Fed is going and some long positions are getting liquidated," Flanagan said. "The market felt heavy in an environment of non-imminent QE3. That doesn't mean they're not going to give you QE3, but the market had priced it in as coming sooner, rather than later."

U.S. stocks rose at the expense of treasuries after investors focused on positive jobs numbers among a mixed bag of data.

The government said U.S. jobless claims edged lower, holding near four-year lows, suggesting the labor market was gaining momentum. On the other hand, the Institute for Supply Management (ISM) said its index showed the pace of manufacturing growth slowed in February.

A decision by the International Swaps and Derivatives Association that Greece's recent moves to prepare for a debt restructuring had not triggered a payout on credit default swaps also damped demand for Treasuries.

"If you're not going to have a CDS event provoked, there's less need for safe-haven debt so you might as well sell some Treasuries," said Cary Leahey, managing director and senior economist at Decision Economics in New York.

Near midday, benchmark 10-year notes were down 24/32, their yields rising to 2.06 percent from 1.97 percent late on Wednesday. The 30-year bond fell 1-24/32, its yield rising to 3.18 percent from 3.09 percent on Wednesday.

The ruling from ISDA also contributed to the generally better environment for peripheral European debt while the safe havens, U.S. Treasuries and German bunds, sold off, said Eric Stein, vice president and portfolio manager at Eaton Vance Investment Managers in Boston.

John Canavan, market analyst at Stone & McCarthy Research Associates, noted that Italian and Spanish spreads, in particular, have narrowed.

Yields on French bonds fell at an auction on Thursday suggesting cash from the European Central Bank's flood of cheap 3-year loans was boosting appetite for longer-term debt.

The French sale, following a 4.5 billion euro placement of shorter-term paper by Spain, came a day after the ECB injected 530 billion euros in funds into banks in the second of two operations that have eased concerns over Europe's debt crisis.

Another riskier asset class, stocks, advanced, drawing investors away from safe-haven Treasuries, Canavan said.

Besides "solid" auctions of Spanish and French debt after Wednesday's long-term refinancing operation (LTRO), China's purchasing managers' manufacturing index hit a five-month high, said William O'Donnell, head of U.S. rate strategy at RBS in Stamford, Connecticut. That offered another potential rationale to sell safe-haven assets, along with the "no real mention of QE3" in Bernanke's Congressional testimony, he said.

Still, Treasuries have not broken out of a range in place since early November, analysts noted.

"Many people are taking profits because you had a move from a little over 2 percent (in the 10-year yield) down to 1.9 percent," Leahey said. "There's been no significant change in the range so in terms of the technical behavior of the market, this move is not a game-changer."

(Editing by Andrew Hay)