Narrow gains scored after well-bid TIPS auction

By Ellen Freilich

NEW YORK (BestGrowthStock) – U.S. Treasuries prices rose on Monday, driving yields near 16-month lows as traders banked on the Federal Reserve’s plan to keep interest rates low.

Bonds have been rallying powerfully, driven by fears that an unremarkable U.S. economic recovery is all but over, leaving little threat of inflation and offering few alternatives for investors looking for safe returns.

And the Federal Reserve, anxious to avoid a de facto tightening of monetary conditions, has set out a plan to reinvest premiums from the maturing mortgage-backed securities it holds into Treasuries.

“The Fed has given the market a backstop by being a buyer of the market for the foreseeable future, and that’s why it’s very difficult for bonds to sell off meaningfully,” said Stuart Short, director of fixed-income for Dinosaur Group, an institutional broker-dealer in New York and London.

“Most estimates are for the Fed to buy around $300 billion of Treasuries over the next 12 months and that equates to the amount of 10-years expected to be sold over the next 12 months,” he said.

With the Fed helping to set the tone, a $7 billion sale of 30-year Treasury Inflation-Protected Securities on Monday was well bid, perhaps presaging a friendly reception to the two-, five- and seven-year conventional notes the Treasury will sell in the coming days.

“Today’s 30-year TIPS auction was much better bid than the February auction as buyside demand took off,” said Thomas Simons, money market economist at Jefferies & Co in New York.

The 2.78 ratio of bids offered to those accepted was the “strongest in the short history of the issue,” he said.

Direct bidders took 28 percent of the issue compared with just 6.44 percent in February. Indirect bidders, often thought to be central banks, absorbed 38.9 percent of the sale, compared with 42.4 percent in February. Dealers took 33.1 percent of the issue, down from 51.2 percent in February.

Some traders said that while the weak economy was positive for bond demand, record lows in two-year yields and lofty prices could test investor appetite for government debt.

“Everybody gets a little nervous about auctions in late August when no one’s around,” added Rick Klingman, managing director of Treasury trading at BNP Paribas in New York.

But in late trade, bonds appeared well-supported.

The benchmark 10-year note was up 6/32, its yield easing to 2.60 percent from 2.62 percent late on Friday. That was still above Friday’s intra-day trough of 2.53 percent, the lowest since March 2009.

The two-year note yielded 0.49 percent, down from 0.50 percent late on Friday but above Friday’s record low (intra-day) just above 0.45 percent.

Analysts cited resistance around 0.47 to 0.48 percent as well as the 0.45 percent area.

“The story of the week is likely, surely has to be, the onset of four Treasury auctions at current yield levels,” said David Ader, head of government bond strategy at CRT Capital Group in Stamford, Connecticut.

“While the news has been inexorably bond friendly … we really have not faced the challenge of auctions at these sorts of levels.”

In the interest rate swap market spreads generally tightened.

(Additional reporting by Burton Frierson; Editing by Leslie Adler)

Narrow gains scored after well-bid TIPS auction