U.S. auction of 2-year notes seen as gauge of investor demand
By Deborah Levine, MarketWatch
SAN FRANCISCO (MarketWatch) — Treasury prices turned down on Tuesday, pushing yields up for the first day in seven, as U.S. stocks gained ground after positive economic data on consumer confidence and housing.
Bonds were up before the U.S. session as the news flow out of Europe pointed out the many economic, political and policy dilemmas faced by the region trying to tame a sovereign debt crisis.
Also, benchmark 10-year yields have fallen for six days — its longest streak since July — and traders could simply find that a good time to consolidate gains.
“We are building a case for reversal over coming days, rather than calling it today, as the quarter-end flows and re-balancing are distorting the underlying picture and may continue into Friday,” said Richard Gilhooly, U.S. director of interest-rate strategy at TD Securities.
U.S. equities extended gains after the Conference Board’s gauge of consumer confidence jumped in September more than expected, to its highest level in seven months — yet remained relatively low. Read: Consumer confidence jumps to 7-month high.
“We have seen bounces in confidence as well as overall growth before in what has been an up-and-down recovery over the past three-plus years, with growth losing momentum again before long,” said Jim O’Sullivan, chief U.S. economist at High Frequency Economics. “That pattern could be repeated. Still, from a near-term perspective at least, the bounce in confidence could set the tone for a variety of other September data.
Yields on 10-year notes 10_YEAR +0.76% , which move inversely to prices, turned up 2 basis points to 1.73% after touching 1.68% earlier. A basis point is one one-hundredth of a percentage point.
Yields on 30-year bonds 30_YEAR +0.31% rose 1 basis point at 2.91%.
Five-year yields 5_YEAR +2.44% increased 2 basis points to 0.67%.
Supporting bonds earlier, Spain’s borrowing costs surged at a short-term bill auction. Read: Spain’s yields jump at auction.
The surge in borrowing costs indicates investors remain nervous about the country’s reluctance to ask its neighbors for a bailout, which would trigger debt purchases by the European Central Bank. Read: How long will Spain’s (market) ‘Inquisition’ go on?
Comments from German Chancellor Angela Merkel also caught attention, showing more cracks in the concept of creating a unified euro-zone banking authority, something many investors see as crucial to stabilizing the region’s financial system.
Analysts also noted that rating agency Standard & Poor's downgraded its forecast for Europe, saying after a recession this year, growth will be flat in 2013. Read: Merkel puts brakes on bank union, S&P lowers euro-zone growth outlook.
“The theme in European monetary policy of three-steps forward and two-steps back remains an enduring characteristic of the process and this is simply more of the same,” said David Ader and Ian Lyngen, bond strategists at CRT Capital Group.
They also noted more reports of Greece’s budget deficit growing, demonstrating that even after a bailout is given, countries may struggle to make the reforms and budget cuts necessary to earn them. Read: FT Alphaville blog: Greek budget shortfall gets bigger.
Coming up at 1 p.m. Eastern time, the Treasury Department will auction $35 billion in 2-year notes 2_YEAR +6.39% , which is often seen as a snapshot of investor demand for Treasury debt.
Traders tend to prepare for auctions by selling existing holdings of the maturity to be sold, both in order to push down prices at the auction and to have cash on hand to buy.
Analysts expect the short maturity to be supported as the Federal Reserve’s policy of keeping interest rates low for years makes short-term debt more attractive.
However, 2-year yields have slowly inched up for the last several sessions, and at 0.27% sit at their highest in more than a month.
Slightly longer maturities being sold this week — 5-year 5_YEAR +2.44% and 7-year notes 7_YEAR +1.55% — are less sensitive to the Fed’s benchmark rates. Yields on those securities turned up Tuesday after a report showed U.S. housing prices rose again in July. Read: Home prices climb for fourth month.
Deborah Levine is a MarketWatch reporter, based in San Francisco.
