Bond Report: Treasurys drop after Bernanke, note auction My Business Blog

Bond Report: Treasurys drop after Bernanke, note auction

NEW YORK (MarketWatch) — Treasury prices fell Wednesday, pushing long-term yields up for a third day, after Federal Reserve Chairman Ben Bernanke led investors to expect the central bank to slowly step back from its ultra-easy monetary policy.

Also weighing on bonds, the government received lackluster demand at its sale of 10-year notes, which traders attributed to worries about the East Coast snowstorm and concerns about monetary-policy moves.

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Yields on 10-year notes /quotes/comstock/31*!ust10y (UST10Y 3.70, +0.06, +1.76%) rose 6 basis points to 3.70%. A basis point is 0.01% and yields move in the opposite direction as prices.

Yields on 2-year notes /quotes/comstock/31*!ust2yr (UST2YR 0.88, +0.06, +7.19%) , more sensitive to changes in interest-rate expectations, rose 5 basis points to 0.88% after Bernanke’s testimony was released.

The Treasury Department sold $25 billion in 10-year notes on Wednesday at a yield of 3.692%, a little higher than traders expected.

Bidders offered to buy 2.67 times the amount of debt being sold, compared to an average of 2.5 times at the last four sales of new securities.

Indirect bidders, a group that includes foreign central banks, bought 33.2%, compared to an average of 41.2%. Direct bidders — which include domestic money managers — purchased another 13%, the most ever for a new issue of 10-year debt and versus 3.2% on average.

A higher proportion of an auction going to indirect and direct bidders is deemed good for the government and the market because it indicates better demand for the debt by investors who will tend to hold the new securities.

It’s also better for the bond market because it leaves less in the hands of primary dealers, which tend to turn and sell some of the new debt into the market, pressuring prices.

News Hub: Fed to Tighten Credit, Raise Rates

Fed Chairman Ben Bernanke outlines a plan to pull back policies that have been propping up the economy. Dow Jones Newswires’ Neal Lipschutz and WSJ’s Sudeep Reddy join Kelsey Hubbard in the News Hub with more.

The government will finish the week by selling $16 billion in 30-year bonds /quotes/comstock/31*!ust30y (UST30Y 4.65, +0.06, +1.40%) on Thursday. It sold $40 billion in 3-year notes /quotes/comstock/31*!ust3yr (UST3YR 1.44, 0.00, 0.00%) on Tuesday.

Reactions to Bernanke

In remarks prepared for a postponed Congressional hearing, Bernanke said raising the discount rate, the borrowing cost for Fed loans directly to banks, would not represent tightening monetary policy. See full story on Bernanke’s comments.

Still, both bond and foreign-exchange markets interpreted it as just that. See Currencies column.

“What the market is reacting to is that despite the chairman’s protestations, monetary tightening of one form or another is really not that far off,” said Christopher Sullivan, who manages about $1.5 billion in fixed-income assets as chief investment officer at United Nations Federal Credit Union.

Bernanke said policy makers would only raise the benchmark fed funds rate — its target overnight lending rate between banks — as economic conditions permit.

The discount rate is currently a quarter-percentage point above the fed funds rate. The central bank lowered that gap from a full percentage point during the crisis to encourage struggling banks to use the discount window.

Bernanke also pledged no near-term sales of assets it has on its books. Holding onto the Treasurys and mortgage-related assets it bought in the last year or so to improve financial-market conditions relieves some pressure on longer-term securities, since that’s the sector the Fed holds the most debt in, said analysts at Guggenheim Partners.

Supporting bonds earlier, the Bank of England lowered its inflation forecast and said more debt buying may be necessary. See more on Bank of England.

Bonds showed little reaction to data showing the U.S. trade deficit widened more than economists expected in December. The trade deficit increased to $40.2 billion in December. Analysts surveyed by MarketWatch expected a widening to a $37.8 billion deficit. See trade deficit story.

Deborah Levine is a MarketWatch reporter, based in New York.

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