TREASURIES-U.S. bond prices rise but three-year debt sale weak

Tue Jan 7, 2014 3:31pm EST

Related Topics

* Poor demand seen at $30 billion three-year note auction
    * Fed's Rosengren sees gradual reduction of stimulus
    * Fed's Williams sees low rates for "foreseeable future"
    * U.S. trade gap shrank to smallest in four years in
November


    By Richard Leong
    NEW YORK, Jan 7 (Reuters) - U.S. Treasuries prices rose on
Tuesday, with benchmark yields hovering near two-week lows, as
traders brushed off a weak $30 billion auction of three-year
notes, part of this week's $64 billion in coupon-bearing
government debt.
    The bond market has stabilized after a dismal 2013 as
evidence of cooling in car sales and the services sector raised
bets the Federal Reserve would pare its massive bond-purchase
program very slowly in coming months.
    Bond-market-friendly remarks from two top Fed officials
spurred some appetite for Treasuries, which posted a 2.75
percent negative return in 2013. 
    "The market is in a holding pattern. Fixed investments are
doing okay," said Sean Simko, head of fixed-income management at
SEI Investments in Oaks, Pennsylvania.
    The U.S. central bank said last month it will buy $75
billion in Treasuries and mortgage-backed securities from
January, $10 billion less per month than what it had been
purchasing in its effort to support the economic recovery.
    Fears about the Fed tapering its purchases resulted in the
Treasuries market in 2013 recording its third-biggest annual
loss in 40 years. Now some investors are reconsidering seeing
the Fed move as a shift in its accommodative tilt and reckon the
current yield levels are an over-reaction to the tapering.
    "I'm paying attention to the tapering. They haven't stopped
that. They are still trying to buy bonds to help increase ...
growth," said James Barnes, fixed income portfolio manager at
National Penn Investors Trust Co. in Wyomissing, Pennsylvania.
    On Tuesday, Boston Fed President Eric Rosengren, who is not
a voter on the Federal Open Market Committee this year, said the
Fed will reduce its current third round of bond purchases "only
gradually" because the economy, while improving, remains fragile
as price growth remains too low. 
    Still, the economy has proven resilient. The Commerce
Department said on Tuesday the U.S. trade deficit shrank to a
four-year low in November on record exports.   
San Francisco Fed President John Williams told a bankers group
in Phoenix he expects the Fed will likely keep short-term
interest rates near zero in the "foreseeable future." He is not
a voter on the policy-setting FOMC this year.   
  
    The Fed bought $2.81 billion in debt due August 2022 to
August 2023 as part of its planned $40 billion purchases in
Treasuries in January. 
    Benchmark 10-year Treasury notes were 6/32
higher in price to yield 2.939 percent, down 2 basis points from
late on Monday. In moderate volume, the 10-year yield fell to a
two-week low of 2.937 percent earlier Tuesday. It had risen to a
near 2-1/2-year high of 3.041 percent last Thursday, according
to Reuters data.
    The 10-year yield will likely bounce round 3 percent before
Friday's December U.S. payrolls report, SEI's Simko said, adding
"Unless you see a December payroll print close to 250,000, a
substantial move above 3 percent is unlikely."
    Economists polled by Reuters forecast U.S. employers likely
added 196,000 jobs in December after a 203,000 rise in November.
 
   
    
    HEAVY SUPPLY WEEK
    Investors, while awaiting the minutes on the Fed's December
policy meeting on Wednesday and the payrolls report on Friday,
prepared to make room for this week's heavy supply of public and
private bonds.
    The Treasury Department sold $30 billion of three-year debt
 and overall demand came in below its recent
average, signaling hesitance among investors, analysts said.
    The auction "didn't go especially well," Stone & McCarthy
Research Associates market analyst John Canavan wrote in a note.
    A J.P. Morgan Securities survey released on Tuesday showed
almost three-quarters of its Treasuries customers said on Monday
they were neutral on Treasuries, or holding longer-dated
government debt equal to their portfolio benchmarks. A week ago,
65 percent said they were neutral. 
    This level of investor caution might be an omen for the rest
of the week. The government plans to sell $21 billion in 10-year
notes on Wednesday and $13 billion in 30-year
bonds on Thursday.  
    Competing for investors' cash will be an expected flood of
investment-grade corporate bonds. Wall Street underwriters
forecast that companies plan to sell $90 billion to $100 billion
in high-grade debt in January, according to IFR, a unit of
Thomson Reuters.
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