By Nick Godt, MarketWatch
NEW YORK (MarketWatch) -- Treasury prices rose on Wednesday, sending yields lower, after the government reported that orders for durable goods sank much more in June than economists expected.
Yields on benchmark 10-year notes (UST10Y 3.64, -0.04, -1.11%) declined 5 basis points to 3.64%. Bond prices move inversely to their yields. A basis point is the equivalent of 0.01%.
Yields on the two-year note (UST2YR 1.12, 0.00, 0.00%) were little changed at 1.13%.
Yields on 30-year bonds (UST30Y 4.50, -0.04, -0.90%) were also down, off 6 basis points to 4.50%.
The 2.5% drop in orders for U.S.-made durable goods was the largest since January and followed on the heels of two straight months of gains. The decrease far exceeded the expected 0.6% fall forecast by economists surveyed by MarketWatch. See full story.
Excluding transportation goods, June's orders rose 1.1%, the Commerce Department's data showed.
Still, the report suggests "the economy is still searching for a bottom," said Steven Ricchiuto, chief economist at Mizuho Securities.
Analysts also pointed to lower equity indexes and other signals that investors remain wary of risky bets in explaining Treasurys' rise.
"Risk aversion is still alive and still threatening to expand/increase in the coming weeks and months," William O'Donnell, head of Treasury strategy at RBS Securities, wrote in a morning note. "If true, Treasurys should benefit while stocks will suffer. Yes we do remain big fans of the Treasury market and it appears that it may soon be safe to re-emerge from the bunker that we crawled into a few weeks ago."
Also supporting U.S. debt, the Federal Reserve will be buying Treasurys maturing between 2019 and 2026 during the session, in its latest operation in a program intended to keep a lid on borrowing costs for individuals and businesses.
Separately, New York Fed President William Dudley said there will likely be moderate growth in the U.S. economy during second half of the year. However, concerns that the Federal Reserve will let inflation get out of control are misplaced because the central bank has the tools to keep its expanded balance sheet from triggering a spike in prices, he said in a speech to the Association for a Better New York.
The Fed's new power of paying banks interest on reserves will limit the amount of credit in the system, Dudley said.
Dudley said the Fed's term asset-backed securities loan facility, or TALF, is working to reduce credit spreads on consumer loans but declined to comment on whether the program will be extended past this year.
Still to come is the Beige Book of anecdotal evidence on conditions in the economy, due at 2 p.m. Eastern time. The report is used by Fed policy makers, who next meet on August 11-12.
"The current report will likely note substantial moderation in the pace of economic decline," said T.J. Marta, chief strategist at Marta on the Markets. "Perhaps more important will be the extent to which it notes actual growth or the expectation of growth in 2009."
Limiting the gains, the government plans to sell $39 billion in 5-year notes (UST5YR 2.59, -0.01, -0.46%) , followed by $28 billion in 7-year notes on Thursday.
UST2YR 1.12, 0.00, 0.00%
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On Tuesday, Treasurys came under pressure after the government's auction of $42 billion of 2-year notes met with less overall demand from bidders than the prior month's sale of the same maturity, as well as far fewer purchases by a class of investors that includes foreign central banks.
Indirect bidders, a carefully-watched category that includes foreign buyers, bought 33% of the sale, down from 69% in the June auction. The June indirect bidding statistics were pushed up from past auctions due to a change in how bids were tabulated.
"This will set up some concern for the longer duration maturities to be auctioned today and tomorrow," said John Rocket Spinello, chief fixed-income technical strategist at Jefferies & Co. The 5-year sale "will require substantially larger participation to relieve the burden from the dealer community that was imposed yesterday."
The amount of 2-year, 5-year and 7-year notes are the largest-ever for the Treasury.
