13/02/2013 21:41:00

Mediocre Sale Sets Treasurys Back for Third-Straight Session

By Cynthia Lin

Treasury prices fell Wednesday after a subpar government debt sale put the market on its heels for a third-consecutive session.

Benchmark 10-year notes traded 10/32 lower in price by late afternoon, yielding 2.019%, according to Tradeweb. The 30-year bond lost 19/32 to yield 3.225%, while two-year notes shed 1/32 to yield 0.278%. Bond yields rise when prices fall.

A $24 billion offering of 10-year Treasurys drew mediocre demand, which then accelerated selling pressure in the market.

Buyers submitted $2.68 in bids for every dollar of debt being sold, below a $2.96 average over the last eight 10-year auctions. The lukewarm reception came even as the government offered to pay a 2.046% yield on the notes. That's first time since April 2012 the government's borrowing costs on this maturity exceeded the 2% mark.

The Treasury concludes this week's round of coupon sales Thursday with a $16 billion, 30-year bond auction.

The safe-haven market has been playing defense since the start of the year as investor outlook on the global economy and euro-zone debt crisis improved. But there's also an unwillingness among bond investors to completely abandon Treasurys because of looming concerns about deep government spending cuts, known as the sequester, set to take effect March 1 unless lawmakers agree on a different plan.

"If we focus back on the sequester, we could actually see yields fall a little more before getting to higher levels," said Michael Kastner, principal at Halyard Asset Management.

The sluggish nature of the U.S.'s economic recovery also means the Federal Reserve likely will keep pushing full-steam ahead with its bond-buying stimulus efforts. The central bank buys $85 billion in long-dated Treasurys and mortgage-backed securities each month, keeping a tight lid on how high yields can rise.

St. Louis regional Fed President James Bullard said he isn't ready to call for an end to the central bank's bond-buying stimulus program. He is a voter on the Fed's policy-setting board this year.

But Mr. Bullard also said the Fed will have to taper the size of its effort as the jobs market improves. The Fed's eventual withdrawal is a looming fear among bondholders. Without the Fed's support, a selloff in Treasurys could quickly negate income earned from today's historically low yields.

Mr. Kastner believes the Fed is starting to share "a very public dialogue" about monetary policy as the economy expands and that a shift to tightening policy will come first in the form of subtle changes in its communication with the public.

This tension has kept the 10-year yield tied closely to the 2% mark over the past two weeks. Bond traders say buyers have shown interest as the yield rises toward 2.06%, while sellers emerge around 1.92%.

U.S. Swap Spreads Mixed

The U.S. two-year swap spread, which measures the difference between the two-year swap rate and two-year Treasury yield and is a main gauge of credit risks, was 0.25 basis point tighter at 15.5 basis points. The 10-year swap spread was 0.25 basis point wider at 9.0 basis points.

COUPON ISSUE PRICE CHANGE YIELD CHANGE

1/4% 2-year 99 31/32 dn 1/32 0.278% +1.2BP

3/8% 3-Year 99 26/32 dn 2/32 0.435% +1.8BP

7/8% 5-year 99 27/32 dn 5/32 0.904% +3.5BP

1 3/8% 7-Year 99 24/32 dn 8/32 1.413% +3.8BP

1 5/8% 10-year 96 17/32 dn 10/32 2.019% +3.8BP

2 3/4% 30-year 90 30/32 dn 19/32 3.225% +3.3BP

2-10-Yr Yield Spread: 174.1BPS v 171.5BPS

Source: Tradeweb

Write to Cynthia Lin at cynthia.lin@dowjones.com

(END) Dow Jones Newswires

February 13, 2013 16:41 ET (21:41 GMT)

Copyright (c) 2013 Dow Jones & Company, Inc.

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