TREASURIES-U.S. bond prices rise on strong 10-year note auction

Wed Sep 11, 2013 3:59pm EDT

* Strong demand at $21 bln 10-year note sale boosts market
    * Hedge move on record Verizon bond deal supports bond
prices
    * Wall Street stock gains keep lid on bond prices
    * U.S. central bank buys $1.50 bln bonds due 2038-2043


    By Richard Leong
    NEW YORK, Sept 11 (Reuters) - U.S. Treasuries prices rose on
Wednesday due to strong investor demand at a $21 billion auction
of 10-year notes, part of this week's $65 billion supply of
coupon-bearing government debt.
    Bond prices earlier rebounded from Tuesday's losses as
dealers bought Treasuries to exit hedges linked to Verizon's
 record-setting corporate bond deal they underwrote. This
interest rate hedge buying faded after the Verizon deal priced.
    The market was also supported by the Federal Reserve buying
$1.50 billion in Treasuries that mature in 2038 to 2043, which
was part of its ongoing purchase program, known as QE3.
    The 10-year note auction was "incredibly strong at a cheap
level. There was fairly aggressive bidding," said Aaron Kohli,
an interest rate strategist at BNP Paribas in New York.
    The latest 10-year supply, which was added to an issue
originally sold in August, cleared at a yield of 2.946 percent,
which was the highest level since June 2011. The latest 10-year
auction yield was nearly 33 basis points above the level set
last month. 
    The 10-year Treasuries sale occurred about an hour after
Verizon sold a $49 billion multi-part bond offering,
whose size eclipsed the previous record of $17 billion by Apple
 in April, according to IFR, a Thomson Reuters service.
    The $11 billion 10-year fixed-rate tranche of the Verizon
deal was sold at a yield of 5.192 percent, about 2.25 percentage
points above the 10-year Treasuries yield. 
    In the so-called "gray" market, the yield spreads of the
Verizon bonds over Treasuries narrowed 50 basis points versus
their pricing levels, according to traders and analysts.
    The strong demand at the 10-year auction and the Verizon
deal signaled investors might feel comfortable to buy bonds at
current yield levels ahead of the Federal Reserve's policy
meeting next week, when it might decide to pare its $85 billion
monthly bond purchases. 
    "The likelihood of the Fed tapering has been well
telegraphed and very well priced into the market. While it's
unclear what the Fed will do next week, tapering should not
spook the market," said Jake Lowery, portfolio manager at ING
U.S. Investment Management in Atlanta.
    Economists told Reuters after the latest jobs report, they
now expect the Fed to begin paring its purchases of Treasuries
and mortgage-backed securities by $10 billion a month, down from
the $15 billion median in Friday's primary dealer poll and a
wider poll in August. 
    On the open market, benchmark 10-year notes last
traded 14/32 higher in price for a yield of 2.912 percent, down
about 5 basis points from late on Tuesday and 10 basis points
below the 25-month high set on Friday.
    The 30-year bond rose 23/32 in price with a
yield of 3.851 percent, down 4 basis points from Tuesday's
close, while the two-year note edged up 1/32,
yielding 0.447 percent, down 2 basis points from Tuesday.
    Treasuries volume was 24 percent above the 30-day average on
Tradeweb's electronic trading system, according to the firm. 
    In the aftermath of a strong 10-year auction and a
blockbuster Verizon deal, traders and analysts were uncertain
whether investors would bid aggressively for Thursday's $13
billion in 30-year Treasury bond supply.
    "It's not a screaming buy like the 10-year," said BNP's
Kohli. 
    In "when-issued" activity, traders expected the reopening of
the 30-year bond issue to clear at a yield of
3.860 percent, higher than 3.652 percent when it was initially 
sold in August.
A couple walks along the rough surf during sunset at Oahu's North Shore, December 26, 2013. REUTERS/Kevin Lamarque

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