Bond prices fall as stocks lure investors

By Ellen Freilich

NEW YORK (Reuters) – U.S. Treasury debt prices fell Thursday as bargain-hunting investors favored stocks after six straight days of declines and the Treasury’s auction of 30-year bonds drew tepid demand.

Yields on the benchmark 10-year note, which had dipped to six-month lows of 2.92 percent on a rise in new jobless claims, climbed back to 3 percent as stocks gained and on the unenthusiastic bid for Treasury’s $13 billion auction of reopened 30-year bonds.

Analysts said bond investors lacked enough motive to buy Treasuries with 10-year yields below 3 percent.

“The stock market stabilized and the economy does not appear to be weak enough to allow 10-year notes to stick at yields below 3 percent over the longer term,” said Chris Rupkey, managing director and chief financial economist at Bank of Tokyo/Mitsubishi UFJ.

In addition, while the Federal Reserve is far from raising interest rates, no further easing has been promised either.

“The economy is not weak enough to bring the Fed back in off the sidelines with (a third phase of large-scale asset purchases) in a couple of weeks,” Rupkey said.

Since late last year, the Fed has been steadily purchasing Treasuries in an amount to total $600 billion when the program concludes at the end of this month. The purchases comprise the Fed’s second phase of quantitative easing, known as QE2, an effort intended to stimulate lending and economic growth.

The strength in stocks and a “soft” 30-year bond auction, the Treasury’s third and final coupon sale of the week, sent 10-year notes down 15/32 in price, leaving their yield at 3 percent.

Thirty-year bonds slipped 14/32, their yields rising to 4.22 percent.

The Treasury sold $13 billion in 29-year, 11-month bonds at a high yield of 4.238 percent, awarding 17.21 percent of the bids at the high. The auction was a reopening of the 30-year bond issue first sold in early May.

The bid-to-cover ratio — the value of bids received over those accepted — was 2.63.

“The auction was soft, stopping at 4.238 percent versus a 4.204 percent 1 p.m. when-issued bid,” said CRT Capital Group government bond strategist Ian Lyngen.

Dealers were awarded 52.3 percent of the issue, versus 47 percent, on average, of the last four 30-year reopenings.

The bid-to-cover ratio was not as strong as the 2.82 average that prevailed over the last four 30-year reopenings.

The Fed’s QE2 program continued Thursday with the U.S. central bank buying $6.94 billion of debt maturing February 2017 through May 2018.

The government said Thursday that initial claims for jobless benefits increased by 1,000 to 427,000 last week, contrary to economists’ median forecast for a drop to 415,000.

Separately, the government said the U.S. trade deficit narrowed unexpectedly in April, as U.S. exports rose to a record and imports from Japan tumbled more than 25 percent in the aftermath of its earthquake, tsunami and nuclear disaster. (Editing by Leslie Adler)