Money & Company

Tracking the market and economic trends
that shape your finances.

« Previous Post | Money & Company Home | Next Post »

Weak demand at Treasury note sale drives rates up

October 12, 2011 | 12:33 pm

The U.S. Treasury saw weak demand at its auction of new 10-year notes, a sign that investors’ hunger for government bonds as a haven continues to ebb -- at least at current low interest rates.

The disappointing auction results Wednesday helped drive market yields on Treasuries higher across the board for a sixth straight trading session. A strong rally in stocks also helped pull money from bonds to equities.

Uncle Sam sold $21 billion of 10-year T-notes at an annualized yield of 2.27%, significantly above the 2.24% yield that analysts had expected just before the auction and up from the 2.15% yield on previously issued 10-year notes on Tuesday.

The 10-year yield, a benchmark for mortgages rates, now is at its highest level since late August.

Wall Street dealers were forced to take 58.5% of the offering Wednesday, higher than normal, because many investors stayed away. Foreign demand was particularly weak, traders said.

The market yield on the 10-year T-note fell to a 60-year low of 1.72% on Sept. 22, when Europe’s deepening debt crisis and fears of another global recession had many investors running for cover.

The rush to Treasuries also had been stoked by the Federal Reserve’s announcement Sept. 21 that it would shift $400 billion of its $1.6-trillion Treasury portfolio from shorter-term securities to longer-term bonds over the next nine months, providing another source of demand for issues such as the 10-year T-note.

Many analysts had expected Treasury yields to rebound somewhat after frenzied buying drove rates to generational lows last month. The 10-year T-note sale suggests that the rebound isn’t over, said George Goncalves, a rate strategist at Nomura Securities in New York.

"It is a rare occurrence for the 10-year Treasury auctions to perform this poorly, especially after a week of rates backing up into the supply event," Goncalves said in a note to clients. "This outcome suggests that rates are not yet at the value-zone for overseas investors."

Still, yields declined from the day's highs after the Fed published the minutes of its last meeting. The minutes showed two unnamed central bank officials were pushing for the Fed to further boost its bond purchases as a way to pump money into the financial system.

The 30-year T-bond yield rose to 3.19%, up from 3.10% on Tuesday and the highest since Sept. 20. The government will sell $13 billion of new 30-year bonds Thursday.

Shorter-term yields also continued to rise. The five-year T-note was at 1.15%, up from 1.13% on Tuesday and the highest since Aug. 5.


A crossroads for the bond market?

Stock rally fades as key indexes near recent highs

Bernanke warns Congress against deep budget cuts in weak economy

-- Tom Petruno

Follow me on Twitter:

Photo: The Treasury building in Washington. Credit: Brendan Smialowski / Bloomberg News