By Deborah Levine, MarketWatch
SAN FRANCISCO (MarketWatch) — Treasury prices fell on Tuesday, pushing benchmark 10-year yields up to their highest level in three weeks, ahead of a government auction of 3-year notes being looked to as an indication of the market’s expectations for the Federal Reserve decision this week.
Yields on benchmark 10-year notes 10_YEAR +2.23% , which move inversely to prices, rose 4 basis points to 1.70% -- their highest level since late August. A basis point is one one-hundredth of a percentage point.
Thirty-year bond yields 30_YEAR +1.24% added 4 basis points to 2.85%. Yields on 5-year notes 5_YEAR +2.63% increased 2 basis points to 0.66%.
The Treasury Department will sell $32 billion in 3-year notes at 1 p.m. Eastern time.
Yields on the current 3-year note 3_YEAR +0.60% added 1 basis point to 0.33%, which would be near the lowest level ever for an auction.
The auction may “provide some clue as to how much of QE3 potential this Thursday has been discounted,” said David Ader and Ian Lyngen, government bond strategists at CRT Capital Group, using the market’s shorthand for a third round of quantitative easing.
The Fed’s policy-setting board will announce its decision on Thursday.
One of the Fed’s options would be to launch another large-scale program of bond purchases. However, there’s no consensus as to whether that may replace the Fed’s current “Operation Twist” under which it’s buying long-term debt and selling short-term holdings. The Fed could just add to the long-end purchases, cut short the short-end selling portion (though it’s never cut short a policy program), or make purchases of mortgage-related bonds instead of Treasurys. However, many suspect the Fed may simply use this meeting to extend its promise to keep interest rates at all-time lows past the end of 2014 — what it put in the last meeting statement.
“If the Fed suspends Twist, then the pressure on this sector dissipates and the 3-year auction should go well,” Ader and Lyngen wrote in a note.
Leslie Barbi, who oversees $30 billion in fixed income assets as head of fixed income for RS Investments, expects the Fed to announce it will buy more Treasury and mortgage bonds.
“Rates are already quite low so the actual impact on rates may be quite modest, and you can argue it will continue to push people into risk assets, like they’re already being pushed,” she said.
Treasury prices slid a bit more in early trading after a report showed the U.S. trade deficit stayed near an 18-month low. Read about U.S. trade deficit.
Moody’s Investors Service said it may strip the U.S. of its triple-A rating unless Congress enacts “specific policies that produce a stabilization and then downward trend in the ratio of federal debt to GDP over the medium term.”
The Treasury market traded in a tight range Monday ahead of the Fed decision, as well as a key German court decision expected on Thursday. However, companies took advantage of the calm to issue $19.5 billion in bonds, the third-busiest day on record, according to Informa Global Markets. Read more on corporate bond sales.
Deborah Levine is a MarketWatch reporter, based in San Francisco.
