Treasurys slip as safe-haven bid fades

March 8, 2011, 2:01 p.m. EST
Treasurys slip as safe-haven bid fades
Auction of 3-year notes sees relatively robust demand
SAN FRANCISCO (MarketWatch) — Treasury prices declined Tuesday, pushing yields up slightly, as investors grew more comfortable moving away from the relative safety of U.S. bonds and into stocks.

U.S. bonds had been higher in earlier trading, amid concerns about European sovereign debt and lingering turmoil in Libya and the Mideast. Reports surfaced that Libyan leader Moammar Gadhafi may be negotiating an exit.

Traders were also trying to position themselves for the trio of government auctions that began Tuesday, which can weigh on the bond market.

Yields on 10-year notes /quotes/comstock/31*!ust10y (UST10Y 3.54, +0.03, +0.74%) , which move inversely to prices, rose 2 basis points to 3.54%, after falling to 3.49% earlier. A basis point is 1/100th of a percent.

Two-year note yields /quotes/comstock/31*!ust2yr (UST2YR 0.73, +0.02, +2.84%)  rose 1 basis point to 0.72%.
Military threat muddies forecasts

Banks may find that their new euro-dollar forecasts are soon out of date if the U.S. military intervenes in Libya.

Yields on 30-year bonds /quotes/comstock/31*!ust30y (UST30Y 4.66, +0.04, +0.76%)  added 2 basis points to 4.65%, after declining in earlier action.

CNN reported that Gadhafi is trying to strike a deal with opposition leaders, saying he will step down if they can guarantee him safe passage out of the country and promise that neither he nor his family will face prosecution.

“I think it’s Gadhafi leaving, if it happens,” said Thomas di Galoma, head of U.S. fixed-income trading for Guggenheim Securities, referring to the bond market’s earlier sluggishness.

Relatively robust demand for Treasurys during the government auction helped bond prices regain some ground.

The Treasury Department sold $32 billion in 3-year notes /quotes/comstock/31*!ust3yr (UST3YR 1.22, +0.01, +0.91%)  at a yield of 1.298%. Bidders offered to buy 3.22 times the amount of debt sold. Indirect bidders, a group that includes foreign central banks, bought 34.4%, while direct bidders, which include domestic money managers, purchased another 12.3%.

The 3-year notes were trading at 1.24%, compared with 1.25% before the auction.

At the four most recent sales of 3-year notes, which were all for the same amount, bidders offered to buy an average of 3.06 times the amount of debt being sold. Indirect bidders bought an average of 34.7%, and direct bidders purchased another 14.6%, on average. See more recent Treasury auction results.

On Wednesday, the government will sell $21 billion in 10-year notes, followed the next day by a sale of $13 billion in 30-year bonds.
Greece, Libya

Yields on Greek 10-year debt reached their highest level since the euro zone was created, analysts said. More investors are now worried that the region’s politicians won’t devise a sufficient solution to overhaul Europe’s rescue fund and fiscal reforms. Read more about the euro zone

At the same time, oil prices remained near $105 a barrel, after a rapid increase sparked concerns that consumer spending, desperately needed to make the U.S. economic recovery self-sustaining, will be reined in. Read more on oil prices, Libya.

“Mideast tensions and Greek bond-default issues should keep Treasury buyers around on any dips,” di Galoma said.

On Monday, Treasury yields inched up, rising for the fourth day in five, closely following U.S. stock action and oil prices. See story on bonds, U.S. stocks.

Also, as usual, the Federal Reserve bought U.S. bonds as part of its asset-purchase program. The U.S. central bank purchased $7.66 billion in debt maturing from 2016 to 2018.

In November, the Fed announced it would expand its balance sheet by $600 billion in an effort to keep interest rates from rising too much. That followed a plan announced in August for the Fed to reinvest cash from its maturing mortgage-related holdings back into Treasurys.

So far, the Fed has purchased about $475 billion in notes and bonds through Monday. See recent Fed buyback results.

Bond traders also noted a private report saying that at the Fed’s meeting next week, officials may change the part of their policy statement that refers to keeping interest rates low for an extended period of time.

“Taking out the language of rates staying lower for an unlimited time is the first step to higher yields,” said Gary Pollack, head of fixed-income trading at Deutsche Bank’s private-wealth-management unit.