By Deborah Levine
Treasurys pared losses Tuesday, pushing up yields, after the
government's auction of $40 billion of two-year notes met strong
demand.
Two-year note yields (UST2YR) rose 1 basis point to 0.92%,
compared to 0.93% before the action. Bond yields move inversely to
prices.
The Treasury awarded $40 billion in 2-year securities -- an
amount that matches a record high set last month -- at 0.949%.
Traders and investors often sell existing holdings in order to
buy the more liquid, newest securities. At the past four auctions
of 2-year notes, bidders offered, on average, $2.39 for every
dollar available.
The indirect bid, a carefully watched category that includes
foreign buyers, was 53.1%, which was "the highest since the 56.0%
on November 2006," said bond strategists at Action Economics. "This
offering was a no-brainer for traders given the cheapening of the
issue and with the Fed putting skin in the game."
The bid-to-cover -- which measures bids received to bids
tendered -- improved to 2.71 from 2.63 in last month's auction.
"The only problem with today is that the Treasury will have to
do it all over again tomorrow and again on Thursday, selling $34
billion of 5-year notes and $24 billion of 7-year notes," said Tony
Crescenzi, chief bond market strategist at Miller Tabak & Co.
"With a deficit of nearly $2 trillion, the pressure to attract
buyers will remain high for quite some time."
The government will also sell a record $34 billion in 5-year
notes (UST5YR) on Wednesday. On Thursday, it will auction $24
billion in 7-year notes, only the second sale of the maturity in
more than a decade. Both amounts are $2 billion more than at the
last sale.
"The prospect of three large Treasury auctions puts us in the
inevitable 'let supply wreak its havoc' mode," said strategists at
RBS Greenwich Capital.
These will be the first auctions since the Federal Reserve last
week said it would buy up to $300 billion in Treasury securities
over the next six months.
Its purchases are expected to be made from the market, not
directly at the auction, but analysts note the central bank is
likely to be most interested in the newest issues, since they serve
as benchmarks for rates on other forms of debt, including
corporate, mortgage and consumer lending.
Doing that would also relieve pressure on the government's 16
primary dealers, which have to bid at auctions of ever-increasing
amounts of debt, to finance all of the economic programs to fix
financial markets.
"An informal Fed backstop for the auction process would remove
some of the underwriting risk for dealers and might result in lower
market yields," said analysts at Wrightson ICAP, a research firm
specializing in government finance. "Unfortunately, the Fed may not
be ready to commit itself to a specific framework for Treasury
purchases as early as today."
Last Wednesday, the Fed said in a statement it would begin
purchases late in the week.
Also on Tuesday, Federal Reserve Chairman Ben Bernanke and
Treasury Secretary Timothy Geithner pressed Congress to give them
new powers to close down non-bank financial firms in an orderly
fashion.
They noted that they had to improvise to bail out American
International Group (AIG), because of all of the exposures of
banks, state and local governments, and money-market funds to the
insurance giant.
Benchmark 10-year yields (UST10Y) were up 7 basis points, or
0.07%, to 2.72%.