Housing data, Fed buyback and two Fed bank speakers on tap
By Deborah Levine, MarketWatch
NEW YORK (MarketWatch) — Treasury prices slipped mildly on Wednesday, giving up some of the previous session’s rally, as U.S. stocks looked likely to recover some ground and as traders prepared for the government’s sale of 5-year notes.
Yields on 10-year notes (UST10Y 3.46, -.00, -0.06%) , which move inversely to prices, rose 2 basis points to 3.48%. A basis point is one one-hundredth of a percent.
Yields on 2-year notes (UST2YR 0.75, 0.00, 0.00%) increased 2 basis points to 0.77%.
Thirty-year bond yields (UST30Y 4.58, -0.02, -0.52%) were little changed at 4.61%.
Yields on the benchmark securities fell to the lowest level in three weeks on Tuesday, as spreading political protests in the Middle East and North Africa have investors turning to assets regarded as safe havens. See more on Tuesday’s bond rally.
“The real focus will remain on the [5-year note (UST5YR 2.14, +0.01, +0.42%) ], which has been a weak point in the auction cycles and was helped significantly over the last few days by the Middle East unrest,” said strategists at Nomura Securities.
Also on tap are data about U.S. existing-home sales for January, due out at 10 a.m. Eastern time, and another Federal Reserve buyback of U.S. debt after 11 a.m.
The central bank expects to buy $1.5 billion to $2.5 billion in 2028 to 2041 debt. The buybacks are the centerpiece of the Fed’s program of $600 billion in asset purchases, intended to keep interest rates from rising too much and threatening the economic recovery.
They also include purchases made under a program announced in August in which the Fed reinvests cash from maturing mortgage-related holdings into Treasurys. Analysts expect that to add another $200 billion or so in Treasury purchases, depending on how much mortgage rates move.
Since housing debt reinvestments began in August, the Fed has bought about $435 billion under the program known as quantitative easing or “QE2,” according to Morgan Stanley. See recent Fed buyback results.
Also on the schedule are speeches from Thomas Hoenig, president of the Federal Reserve Bank of Kansas City, and Philadelphia Fed chief Charles Plosser later in the afternoon.
Both Hoenig and Plosser are “hawks [who] have had concerns for inflation and opposition to the extent of the QE2” and any further bond-buying plan that some Fed officials may be considering, said John Spinello, Treasury strategist at Jefferies & Co.
Both Nomura and Jefferies are among the 20 primary government-securities dealers that trade directly with the Fed and are required to bid at Treasury auctions.
Auction upcoming
The Treasury Department will close its auction of $35 billion in 5-year notes at 1 p.m. Eastern time. The amount hasn’t changed since August.
Over the last four auctions of 5-year debt, bidders have offered to buy an average of 2.76 times the amount of debt sold.
Indirect bidders, a group that includes foreign central banks, purchased an average of 37.9% in recent sales. See recent Treasury auction results.
Analysts regard these statistics, as imperfect as they are, as a snapshot of foreign investors’ appetite for U.S. debt. Final figures on what types of investors were buying at the auction take longer to be released.
Direct bidders, a group that includes domestic money managers, bought another 10.8%, on average. The amount bought by this class has dipped in auctions that have occurred after two big trading firms joined the primary dealers, which are counted as their own class of bidders.
A higher proportion of a sale going to direct and indirect bidders is considered a sign of good investor demand. When primary dealers, since they are required to bid, end up with more of the new debt, they tend to turn around and sell it, weighing on prices.
