US Yields Back Up Ahead of NFP

The Treasury 10-year benchmark note is on course to complete its steepest weekly gain in three-months as European leaders struggle to contain their periphery region’s debt crisis and before last months NFP report to show hiring in the US slowed (+85k). With Greece facing the danger of a disorderly default has raised the “specter of a run on lenders in other countries” insuring that the flight to quality will continue.

In the O/N session, treasuries have declined,with 10’s backing up+3bp to +2.09%, as global bourses gained after Greece scrapped a referendum on a bailout plan, moving the country closer to receiving Euro and IMF aid again. Papandreou yesterday ditched the referendum to avert a split in his party and lose his grip on power.

Also aiding prices this week was the Fed leaving intact its promise to keep its target interest rate in a range of zero to +0.25% until 2013. Policy makers again forewarned investors of impending dangers. “There are significant downside risks to the economic outlook, including strains in global financial markets”. The Fed remains disappointed in the overall economy’s performance and that if anything, “downside risk still permeates the future forecasts on both the inflation and employment mandate”. The Fed it seems is just looking for the right time to pull the QE3 trigger.

Next week, the treasury will auction +$72b in 3’s, 10’s and 30-year debt. With supply, prices at these levels look expensive. Expect dealers to cheapen up the curve accordingly, assuming Greece and NFP allow them to!

U.S. Ten-Years:

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