US Treasuries jolted, 30-yr yld highest in a year
By Steven Scheer
NEW YORK, May 11 (Reuters) - Poor demand for the U.S. government's new
five-year notes on Tuesday triggered a wave of selling of Treasuries in late trading,
pushing the 30-year bond's yield to its highest closing level in nearly one year.
At the 1500 EDT/1900 GMT futures close, the benchmark bond was at 91-20/32,
down almost 3/4-point from Monday's close, while its yield jumped to 5.85 percent
from 5.79 percent.
The bond, which hit an intraday high of 5.86 percent, closed at its highest yield since May 26, 1998 when it also ended
the day at 5.85 percent.
After rallying for the first time in seven sessions on Monday, Treasuries took only modest declines into the first leg of
the Treasury's quarterly refunding of $27 billion of five- and 10-year notes. Most market players believed that the recent
sell-off and spike in yields would entice buyers at the cheapest levels in a year.
The Treasury awarded the five-year notes at a largely expected 5.367 percent -- its highest since last June -- with the
bid-to-cover ratio of 1.74 the worst in a couple of years.
Dealers called the auction a disappointment and said there was no buying after the auction. As a result, dealers -- as well
as funds -- sold Treasuries, with five- and 10-year notes hit the hardest.
''Professional sellers are outweighing any conviction about buying at higher yields,'' said John Spinello, market strategist
at Merrill Lynch & Co.
After the auction, ''No one was willing to come in and buy in the secondary market,'' he said. ''They had the opportunity
to buy if they had the perception that (the five-year) was cheap.''
Traders said that some dealers took on long positions Monday with the expectation that the rise in yields would stop and
demand would be solid at the refunding auctions.
''They took a shot at being long but now they are getting out of stuff aggressively,'' said Bill Kirby, co-head government
bond trader at Prudential Securities Inc. ''It was a Street-led function.''
Some players reported selling by George Soros' hedge fund, which came hours after Soros Fund Management
investment chief Stanley Druckenmiller said global bond markets will remain in a bear market for another two years as
the U.S. economy remains robust and economies around the world rebound.
''The possibility of a global (economic) boom is not remote,'' he said at a London investment conference. ''The global
economy will suck money out of the bond market -- it's about the only thing we made money in this year.''
Part of the problem for Treasuries these days, analysts said, is that retail investors have shunned them in favor of higher
yielding agency and corporate debt.
''They (retail) want to get 50 to 60 basis points over Treasuries,'' said Vincent Verterano, head trader at Nomura
Securities International Inc.
Adding to the pressure on Tuesday was the 4.3 percent rise in U.S. compensation costs during the first quarter, even as
productivity surged by 4.0 percent over the first three months of the year. That fueled more fears the Federal Reserve
may shift to a tightening bias in the near future.
Merrill's Spinello noted that even as market interest rates were climbing from late last year into the second quarter of
1999, many investors figured rates would eventually stop rising and reverse.
''Now, people have come to the conclusion that rates are not going down,'' he said. ''More people are convinced that it
will be difficult to have a rally in market rates in the foreseeable future.''
In addition to the 30-year bond yield hitting a fresh one-year high, the 10-year note was at 5.59 percent in late trading, its
highest closing level since June 4 of last year. And, the outstanding five-year note's yield of 5.42 percent ended at its
highest level since August 6.
The two-year note, however, ended futures trade at 5.19 percent -- still three basis points below its March 1999 high.
The 10-year's price fell 11/32 while the five-year's price dipped 7/32.
In late when-issued trade, the five-year was at 5.387 percent, while the 10-year was at a 5.50 percent yield.
The Treasury will sell $12 billion of 10-year notes on Wednesday.
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