Bonds down slightly ahead of 10-year auction

By Burton Frierson

NEW YORK (BestGrowthStock) – Treasuries slipped on Tuesday as traders sought a modest cheapening of the market ahead of a $21 billion auction of 10-year notes later in the day.

It’s the second of this week’s three auctions worth a total of $69 billion and follows Monday’s lackluster three-year offering, which appeared to suffer from unattractively high prices after a bond market rally dating back to April.

Though traders usually try to soften up the market ahead of auctions, safe-haven flows into bonds over the last three months due to fears over Europe’s fiscal crisis and worries over a slowing U.S. economy have made that difficult.

Analysts said major releases later in the week including minutes of the Federal Reserve’s latest meeting and consumer price inflation data were not expected to hurt bonds, making it difficult to build a bigger pre-auction price concession.

“The price action seems pretty good to me. It seems like a very orderly sell-off into the auction today,” said Marty Mitchell, head of government bond trading at Stifel Nicolaus in Baltimore.

“I just think there’s enough out there that is concerning to people that Treasuries are going to have difficulty moving much higher in yields. There’s the potential for a safety flow to enter back into the market at any time.”

The benchmark 10-year note was last down 8/32 in price, yielding 3.09 percent versus Monday’s close of 3.06 percent.

The yield is also up from a one-year low of 2.88 percent hit at the start of July, when the rally reached its peak.

The area around 3.06 percent had been a key area of technical support, proving difficult to break on a sustained basis. After that analysts see support around 3.12 percent, 3.18 percent and 3.33 percent.

The 10-year note was weaker versus other sectors within fixed income, with the swap spread narrowing to 4.25 basis points versus Monday’s 5.25 basis points.

A $35 billion offering of U.S. three-year Treasury notes on Monday attracted only moderate demand, signaling some leveling off in the recent intense appetite for government bonds, at least in low-yielding short maturities.

It probably didn’t help that the sale cleared at a record low yield of 1.055 percent, leaving some investors to wonder what they’re getting for their money.

The low absolute level of yields is one reason why even bond bulls have been expecting at least a temporary retreat, while signs of a stock market rebound might also have dimmed the allure of safe-haven government bonds.

“We continue to err on the side of more retrenchment, i.e. higher yields, so share the frustration with others who share this opinion or desire,” said David Ader, head of government bond strategy at CRT Capital Group in Stamford, Connecticut.

“True, the market’s backed up ‘nicely’ off the highs … but also true is the fact that the back-up has not generally seen a lot of selling.”

After Tuesday’s 10-year sale, Treasury will auction $13 billion worth of 30-year long bonds on Wednesday.

The 30-year bond was last down 9/32 in price, yielding 4.07 percent against less than 4.06 late Monday. Long bonds were also weaker versus swaps, with the spread at -22.0 basis points from Monday’s -21.75 basis points.

(Reporting by Burton Frierson; Editing by Andrew Hay)

Bonds down slightly ahead of 10-year auction