Buyers balk at Treasury note sales, forcing yields up

This article was originally on a blog post platform and may be missing photos, graphics or links. See About archive blog posts.

The Treasury suddenly is having a harder time finding investors to buy its shorter-term debt, which typically is an easy sell.

That’s triggering a fresh case of nerves among bond traders, given Uncle Sam’s continuing massive borrowing needs.

The Treasury’s auction of a record $39 billion in new five-year T-notes today saw weaker-than-expected bidding -- a replay of what happened at Tuesday’s sale of $42 billion in two-year T-notes.

The government had to sell the five-year notes at an annualized yield of 2.69%, well above the 2.635% yield forecast in a Bloomberg News survey of bond dealers.

Investors put in a total of $75 billion in bids for the five-year notes -- enough to make the sale, obviously, but still less than expected.

The five-year auction ‘now takes the cake as one of the worst-performing auctions for the year,’ said George Goncalves, chief rates strategist at bond dealer Cantor Fitzgerald in New York.

The two-year T-note sale on Tuesday ‘was indeed the shot across the bow as front-end demand for Treasuries is waning more and more as we get deeper in the second half of the year,’ he said.

Worse for investors who bought the two-year notes at the auction yield of 1.08%: The market yield on the notes has jumped to 1.18% today -- the highest in five weeks -- as dealers struggle to find buyers.

Tom Di Galoma, head of U.S. rates trading at Guggenheim Capital Markets in New York, said one rumor was that China wasn’t a buyer at either of the auctions this week -- which, if true, would be a slap at Treasury Secretary Timothy F. Geithner, who sought to assure the Chinese on Monday that the U.S. will eventually rein-in its borrowing.

The government has another big sale coming on Thursday, when it will auction $28 billion of seven-year notes. The market yield on existing seven-year notes is at 3.32% today, up from 3.28% on Tuesday.

Treasury yields had been moving up in recent weeks as the hot rally in the stock market lured cash out of the bond market. But today stocks are lower across the board -- reacting, in part, to the disappointing T-note auctions.

The Dow Jones industrial average was down 62 points, or 0.7%, to 9,035 at about 11:15 a.m. PDT.

-- Tom Petruno