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Treasury bond yields rise as some investors shun new debt sale

June 27, 2011 | 12:19 pm

Some investors have lost their appetite for U.S. Treasury bonds with yields at their lowest levels since late last year.

Government bond yields rose Monday after the Treasury faced surprisingly weak demand at its auction of $35 billion in new two-year notes, the first of three note auctions this week.

The two-year notes sold at a higher-than-expected annualized yield of 0.395%, and a category of buyers that typically includes foreign investors bought relatively few of the securities.

That forced Wall Street bond dealers to buy 64.5% of the notes, well above their average purchases of 50% at the last four auctions of two-year notes, according to CRT Capital Group.

“It didn’t go so well,” Ray Remy, head of fixed-income at Daiwa Capital Markets in New York, said of the auction. “It could be that the rally in yields had gone too low.”

5yr627 Treasury rates were higher across the board after the auction. The five-year T-note yield (charted at left) rose to 1.44% from 1.37% on Friday. The 30-year T-bond jumped to 4.28% from 4.18%.

Still, those are minor bounces given how far yields have fallen.

Investors have been pouring into Treasuries since mid-April, driving yields down, as fears have mounted about the weakening global economy and Europe’s ongoing government-debt crisis.

Despite the risk of a bond default by August if Congress fails to raise the federal debt ceiling, Treasuries have been playing their traditional role of a haven in times of market and economic turmoil.

But some investors were in a mood to take more risk Monday. A rally in beaten-down technology shares helped pace a broad advance in the stock market, which may be pulling some cash away from the bond market. The Dow Jones industrial average was up 142 points, or 1.2%, to 12,077 at about 12:15 p.m. PDT.

Concern about Europe ebbed a bit after France put forth a plan for private investors to voluntarily roll over existing Greek government bonds into longer-term issues, to give the debt-hobbled nation more breathing room.

Treasury demand will be tested again Tuesday and Wednesday, when the government will auction $35 billion in five-year notes and $29 billion in seven-year notes, respectively.

Another jump in yields could revive fears that the Treasury market will struggle without regular purchases by the Federal Reserve, which on Thursday will complete the $600-billion bond-buying program that it launched in November in an attempt to bolster the economy.

But the Fed still will be a presence in the market, purchasing Treasuries with proceeds from maturing bonds in its $2.6-trillion securities portfolio.

-- Tom Petruno

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