DJ Tsys Rocked By Supply, Fed Fears, 10-Yr At 06 High 4.48%
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By Michael Mackenzie
Of DOW JONES NEWSWIRES
NEW YORK (Dow Jones)--U.S. Treasury prices slumped Wednesday, rocked by a poorly received two-year note sale amid investor concern over next week's meeting of the Federal Reserve and forthcoming supply in February.
In late trade the 10-year note was yielding around 4.48%, up from a session low of 4.41%. The maturity broke the shackles of the 4.32%-4.46% range that had previously sufficed for January. Banks and hedge funds dominated selling flows amid hefty volumes said traders.
Treasurys opened for New York trading under pressure and that steadily intensified, receiving a fresh bearish infusion when dealers were left holding much of the $22 billion two-year notes sold by Treasury.
The poor auction result weighed upon a market already pondering what reception from investors awaits a large calendar of new Treasury supply slated for February.
Meanwhile, the growing proximity of the Jan. 31 meeting of the Federal Reserve was also hampering sentiment for Treasurys across the curve.
The Fed is widely expected to raise the federal funds rate to 4.50% from 4.25% next week, and the odds of a further hike to 4.75% in March have moved up to around 70% from 60% of last week.
"A weak two-year auction," and "renewed chatter that even with the Fed in neutral next week, the market still needs to be more vigilant to a March hike," were the major factors pressuring Treasury prices said David Ader, bond strategist at RBS Greenwich Capital in Greenwich, Conn.
Another factor clouding market sentiment over the Fed is the looming transition at the top. Current Chairman Alan Greenspan will retire after next week's meeting and his replacement, pending a Senate vote, is Ben Bernanke.
That and possible policy changes in turn helped explain the reluctance of investors outside Treasury dealers in buying the new two-year note.
"We are approaching the Fed meeting and a lot of people didn't want to commit and buy the two-year," said Jason Graybill, managing director at Abner Herrman & Brock Asset Management in Jersey City.
Around 3:45 p.m. EST (2045 GMT), the 10-year Treasury note was down 23/32 at 100 5/32 to yield 4.48%. The 30-year Treasury was down 1 and 12/32 at 110 18/32, yielding 4.62%.
The five-year Treasury was off 12/32 at 99 10/32 to yield 4.40%, while the three-year note was down 7/32 at 99 29/32 to yield 4.42%. The two-year note was down 5/32 at 99 27/32 to yield 4.46%.
Treasury sold $22 billion two-year notes at a high rate of 4.427% and at a bid to cover ratio of 2.11, the lowest since April 2005. Just before the sale, the when-issued two-year was quoted at 4.43%. The indirect bid, a classification of buyer outside primary dealers was a tepid 25.6%, the lowest since April 2005 and under market expectations of around 30%. In December, the two-year indirect bid was 31% and the average for 2005 was 35%.
"Dealers are pretty much left holding the auction and there is a risk of further selling in Treasurys as they find a home for the new two-year," said George Concalves, treasury and agency strategist at Banc of America Securities in New York.
Earlier in the session, investors largely brushed off data from the National Association of Realtors showing existing home sales in December slipped 5.7% to an annual rate of 6.60 million from November's upwardly revised 7.00 million annual pace.
"The housing market is still at historically high levels, but the data are continuing to point to gradual cooling," noted Lehman Brothers.
The expectation of slowing housing activity is the foundation of the bond market's view that the Fed will soon end its monetary tightening campaign.
That move and continued signs of growth in the euro zone may help chip away at stubbornly low global yields, said William Kohli, portfolio manager at Putnam Investments in Boston.
At some point, "the global rate structure has to move higher," Kohli said. The European Central Bank - which has already hiked short-term rates once - could help effect such a move if it raises rates several more times this year, he said.
For now many investors expect continued foreign demand for U.S. fixed income assets will help cap any rise in long term yields and interest rate volatility. Particularly with the February debt refunding looming.
Treasury Undersecretary for International Affairs Tim Adams told Bloomberg TV early Wednesday that he had "no concerns" about investor appetite at upcoming Treasurys auctions. He also said he was not worried about speculation that Asian central banks and oil-producing countries may shift savings away from dollar-denominated securities.
"The U.S. economy is the best place in the world to park your capital.... The dollar is still the best currency in the world, so I'm not worried," he said from the annual gathering of economic and business leaders in Davos, Switzerland.
COUPON ISSUE PRICE CHANGE YIELD CHANGE
4 3/8% 2-year 99 27/32 dn 5/32 4.46% +7.9 BP
4 3/8% 3-year 99 29/32 dn 7/32 4.42% +8.7 BP
4 1/4% 5-year 99 10/32 dn 12/32 4.40% +8.6 BP
4 1/2% 10-year 100 5/32 dn 23/32 4.48% +8.9 BP
5 3/8% 30-year 110 18/32 dn 1 12/32 4.62% +8.6 BP
2-10-Yr Yield Spread: 2 BPs Vs 0 BPs
Source: TradeWeb
-By Michael Mackenzie, Dow Jones Newswires; 201-938-5451; michael.mackenzie@dowjones.com
(Steve Johnson and Laurence Norman contributed to this article) |
