Bonds up on weak stocks, strong auction

By Burton Frierson

NEW YORK (BestGrowthStock) – Treasuries rebounded on Tuesday after three straight losing sessions, as waning confidence in the U.S. stock market lifted safe-haven bonds and helped produce a strong auction of three-year notes.

Investors were reassessing their initial relief about the latest U.S. monthly jobs report on Friday, which was less grim than expected. Resurgent worries over the euro zone’s financial health also enhanced the allure of bonds.

The bond market had been closed on Monday for the Labor Day holiday.

A well-received auction of $33 billion worth of three-year Treasuries, the first of this week’s three bond offerings totaling $67 billion, added to the bond-positive sentiment. The auction produced a record-low yield, the latest in a series for Treasury offerings.

The sale attracted bids worth 3.21 times the amount on offer, right on their six-month average. The record-low yield at the auction also came in below expectations, indicating investors were willing to pay a small premium to get the bonds.

“With renewed European concerns and weaker risk assets today, the flight-to-quality bid to the Treasury market helped support today’s three-year auction,” said John Briggs, U.S. Treasury strategist at RBS Securities in Stamford, Connecticut.

The benchmark 10-year note was last up 22/32 in price, yielding 2.63 percent versus Friday’s close of 2.70 percent.

The 30-year long bond was up nearly two points, last trading 1-29/32 higher, yielding 3.68 percent versus Friday’s close of 3.78 percent.

FEARS AWAKENED

A report on the European banking system reawakened fears about the region’s financial health. The Wall Street Journal report raised questions about bank stress tests carried out in the euro zone earlier in the year.

Separately, Germany’s banking association said the country’s 10 biggest banks may need 105 billion euros ($141 billion) of additional capital under a revamp of banking rules designed to prevent future financial crises, which weighed on financial shares.

The gloom from Europe and the stock markets allowed bond traders to ignore some minor signs of weakness in an otherwise strong bond auction.

“There’s a little bit of a defensive bid in the market right now,” said John Spinello, Treasury bond strategist at Jefferies & Co. in New York.

Among those negatives, primary dealers took 45.9 percent of the sale, above their six-month average of around 39 percent, meaning they were stuck with a larger-than-usual proportion of the offering to sell on to the market.

That was the highest dealer take in percentage terms since May 2009, though auction sizes have been declining this year.

Foreign central bank and large institutional investor demand appeared soft compared to recent averages, based on the indirect bidder category, which accounted for about 42 percent of the sale.

This was well below the average of about 47 percent in the last six auctions, though higher than the two previous sales.

The recently growing direct bid accounted for 11.7 percent of the offering, below the six-month average of nearly 14 percent.

(Additional reporting by Emily Flitter, Richard Leong and John Parry; Editing by Leslie Adler)

Bonds up on weak stocks, strong auction