As year ends, U.S. tries to squeeze in one more big bond sale

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Uncle Sam’s voracious appetite for cash will bring the Treasury into the market this week to borrow $118 billion via sales of two-, five- and seven-year notes.

Evidently, Uncle’s need for money overrode the understandable concerns that many potential bond investors and traders would be away from Wall Street between the Christmas and New Year’s holidays.

Partly reflecting worries about demand at this week’s big sale, the marketplace has pushed up Treasury note and bond yields across the board in recent weeks. The accompanying chart shows the seven-year T-note yield.

We’ll see if current yields are high enough to make domestic and foreign buyers happy -- or whether they’ll demand even more to step up to the plate.

The housing market has a lot riding on the trend in Treasury yields because mortgage rates take their cue from long-term government bond rates.

The Treasury’s sales begin today with an auction of $44 billion in two-year notes, to be followed by auctions of $42 billion in five-year notes on Tuesday and $32 billion in seven-year notes on Wednesday.

In overnight trading the annualized yield on existing two-year notes stood at about 0.98%. The yield has jumped from a recent low of 0.67% at the end of November.

Two-year T-note sales usually are a breeze because investors don’t see much risk in holding debt of that term. The five-year and seven-year note sales will be more telling.

The five-year T-note yield, at about 2.57% now, is up from 2% at the end of November. In the same period the seven-year T-note yield has surged to 3.34% from 2.69%.

The Treasury still is borrowing at relatively cheap rates, overall. The big question is whether bond investors increasingly will figure that these yields as too low relative to what 2010 will bring for the economy and inflation -- not to mention the pressure from additional government borrowing to fund the yawning budget deficit.

You wouldn’t want to be buying a five-year note yielding 2.57% if you thought the market would be demanding a yield of, say, 3.5% on new five-year notes in six months.

So far, the stock market -- which ended last week at new highs for the year -- seems to be viewing rising Treasury yields as the logical consequence of an improving economy. It also helps Wall Street’s mood that, even as Treasury bond rates have risen, yields have remained tame this month in other debt markets, including municipal bonds and junk corporate bonds.

But typically thin trading at year-end makes all market moves suspect. We’ll have a much better sense of how bond and stock investors really feel when they’re back in force next week.

-- Tom Petruno