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Treasury pays up to sell debt in first stage of big sale

December 28, 2009 | 12:10 pm

The Treasury sold $44 billion in new two-year notes today at an annualized yield of 1.09%, slightly above Wall Street's expectations, as investors demanded higher returns to absorb the latest wave of government debt.

As noted in this post, Treasury note and bond yields have risen sharply in recent weeks, in part on concerns about demand at this week's sale of a total of $118 billion in U.S. securities. Rates also have been facing upward pressure from expectations that the economic recovery will continue in 2010.

The Treasury, hungry for cash, is trying to raise a big chunk of change in a week when many Wall Street traders and investors typically are absent for the holidays.

The two-year notes had been expected to pay 1.06%, according to a Bloomberg News survey of bond dealers.

The market yield on outstanding two-year notes has surged from 0.67% at the end of November. The steep run-up in yields suggests "the market is saying a fair goodbye to the land of 1%" for two-year securities, said George Goncalves, chief fixed-income rates strategist at brokerage Cantor Fitzgerald in New York.

Treasury data on today's auction indicated that foreign buyers were less interested than usual in the two-year notes, while demand from banks and mutual funds appeared to be strong.

Uncle Sam will follow today's sale with auctions of $42 billion in five-year notes on Tuesday and $32 billion in seven-year notes on Wednesday. Previously issued five-year notes are yielding about 2.59% today; seven-year notes are yielding about 3.33%.

-- Tom Petruno

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