Bond yields fall as final Treasury sale of 2010 sees strong demand

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The latest jump in Treasury bond yields was enough to lure buyers back to the battered market on Wednesday, as the government held its final debt sale of 2010.

The Treasury’s auction of $29 billion in seven-year notes saw strong demand, one day after a poorly received five-year note sale.

The weak turnout for the $32 billion of five-year notes had driven Treasury yields higher across the board on Tuesday, a move magnified by typically thin end-of-year trading. The yield on previously issued seven-year notes closed at 2.88%, up from 2.72% on Monday and the highest since May.

But that brought buyers in on Wednesday: The new seven-year notes sold at a yield of 2.83%, and strong bidding from institutional investors, including foreigners, meant that Wall Street bond dealers took just 31.2% of the notes for their own inventory.

By contrast, dealers wound up with 58% of the five-year notes on Tuesday because of the dearth of demand from other investors.

Yields are down across the board on Treasuries on Wednesday. The five-year T-note fell to 2.06% from Tuesday’s auction yield of 2.15%; the 10-year T-note slid to 3.35% from 3.48%.

Nothing left to do now but close the books on 2010 and wait to see how bond investors react once the new year begins: Will they continue to sell fixed-income securities, expecting interest rates to rise further with an improving economy? Or will faith in the recovery fade and drive haven-seeking money back to Treasuries?

-- Tom Petruno