Late sell-off cools hot market before supply

By Richard Leong

NEW YORK (BestGrowthStock) – U.S. Treasuries retreated on Friday, as a late sell-off cooled a market run-up that pushed two-year yields to record lows and longer-dated yields to their lowest in nearly 1-1/2 years.

In the absence of major data, investors were reluctant to amass more bonds ahead of next week’s $109 billion supply of coupon-bearing debt, analysts said.

Bonds also took their cue from Wall Street, which was beaten down much of the day on economic worries before retracing the decline in a late burst of buying, traders said.

This week’s surge in bond prices, led by the 30-year, was not sustainable even in the face of investor angst over growing signs of a faltering U.S. economic recovery, analysts said.

“The bond market is overreacting a little bit on deflation and double-dip (recession) fears at this point,” said Perry Piazza, director of investment strategies at Contango Capital Advisors in San Francisco.

The scramble for long-dated Treasuries from a cross-section of investors — pensions, insurers, hedge funds, mortgage companies — came despite various statistical measures that have signaled Treasuries are too expensive.

This intense demand took the 30-year yield to 3.60 percent, the lowest in 16 months, and the 10-year yield to 2.53 percent, the lowest in 17 months.

The Sept T-bond futures hit a contract high at 135-7/32, while the Sept ultra bond contract set a contract peak at 144-13/32.

The three major U.S. indexes (.DJI: ) (.SPX: ) (.IXIC: ) were flat to lower in late trading, above their earlier lows. (.N: )

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Fears of a fizzling economic recovery spurred a stampede into bonds this week. Investor preference for long-dated issues was underpinned by the Federal Reserve’s pledge to keep short-term interest rates near zero and a lack of any hint of inflation.

The 30-year bond yield recorded its biggest one-week drop in about three months. Since the start of August, it has fallen some 40 basis points.

The two-year yield ended at 0.50 percent after setting a record low of 0.46 percent earlier.

The breadth of this week’s rally surprised even those investors who have been bullish on bonds. This led some of them like Contango’s Piazza to scale back their bullish bets on long-dated debt and to reinvest the money into short-dated Treasuries and high-quality, dividend-paying stocks.

Some traders cautioned the ultra low yields, which make bonds expensive, could curb bidding at next week’s Treasury auctions.

The Treasury Department will kick off next week’s sales with a $7 billion reopening on an existing 30-year inflation bond issue.

“It’s hard to think people would bid aggressively for them in this climate,” said Russ Certo, managing director at Gleacher & Co. in Stamford, Connecticut.

(Reporting by Richard Leong, Editing by Chizu Nomiyama)

Late sell-off cools hot market before supply