BOND REPORT: Treasurys Little Changed After Auction, Fed Minutes
Tuesday January 6th, 2009 / 20h30
By Deborah Levine
Treasury prices declined Tuesday, sending 10-year note yields to the highest levels seen in a month, paring losses after the government's first note auction of the week.
Investors also focused on minutes released Tuesday afternoon from the Federal Reserve's historic interest-rate meeting last month. Policymakers saw increasing risks of depression and deflation as they grappled with employing new tools to stabilize the economy.
Ten-year note yields (UST10Y) rose 1 basis point, or 0.01%, to 2.49%. It earlier reached 2.60%, the loftiest since Dec. 11.
Two-year note yields (UST2YR) also rose, up 2 basis points to 0.81%. Bond yields move inversely to prices.
At the U.S. central bank meeting on Dec. 15 and 16, officials took several unprecedented measures to combat the recession, including lowering its interest-rate target to a range just above zero and switching the focus of monetary policy to unconventional methods to get financial markets and economic activity growing again.
In earlier trading, Treasurys stayed lower after data showed further weakness in the services, housing and factory segments of the economy,
The Institute for Supply Management's non-manufacturing index made an unexpected modest improvement, though the reading indicated the industry is still contracting.
The index rose to 40.6 in December, off from November's 37.3.
Analysts polled by MarketWatch were looking for the ISM services index to fall to 37.
"While we've priced in horrendous data, there's no sign of it abating any time soon," said David Ader, U.S. government bond strategist at RBS Greenwich Capital.
Separate reports showed that in November, U.S. factory orders dropped 5.3% and pending home sales slid 4%.
TIPS auction
The Treasury Department sold $8 billion in 10-year Treasury Inflation Protected Securities, or TIPS, to yield 2.245%.
Investor demand was strong, with $2.48 offered for every dollar available, the highest since at least 2002.
Indirect bidders, a class of investors that includes foreign central banks, purchased 47% of the auction, compared to 36.2% on average in the last four auctions.
That yield is about 30 basis points below than regular 10-year Treasurys. The gap represents the rate of inflation investors anticipate over the life of the debt and could have spurred demand by investors who expect inflation to be higher, making the TIPS relatively cheap.
The government will also sell $30 billion in three-year notes (UST3YR) on Wednesday and $16 billion in 10-year notes on Thursday.
Yield curve
Reports on plans by Congress and President-elect Barack Obama to pass a large fiscal stimulus package have fixated bond investors on the amount of debt the government will need to raise to finance its spending.
The gap between two- and 10-year yields has increased in the last six trading days to 1.69 percentage points, steepening the so-called yield curve.
"The hopes for Obama's stimulus package, concerns about the bearish implications of increased supply and decreased demand, and asset reallocation out of Treasuries and into mortgage-backed securities, on the back of the Fed's buying program, have put upward pressure on the long end of the curve," said T.J. Marta, fixed-income strategist at RBC Capital Markets.
The Fed announced on Monday it had begun buying mortgage-backed debt, part of its many initiatives to lower mortgage rates and stimulate the housing market.
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