TREASURIES-Short-, intermediate-date debt weakens before supply

Mon Mar 24, 2014 9:50am EDT

Related Topics

* Two-, five-year notes underperform before supply
    * Treasury to sell $96 bln in 2-, 5-, 7-year notes this week
    * Fed to buy $500 mln-$750 mln debt due 2024-2031

    By Karen Brettell
    NEW YORK, March 24 (Reuters) - U.S. Treasuries prices fell
on Monday, with intermediate-dated debt the worst performers,
before the U.S. government sells $96 billion in new short- and
intermediate-dated coupon-bearing debt to investors nervous that
the Federal Reserve may raise interest rates sooner than
expected.
    Short and intermediated-dated Treasuries yields have jumped
since Federal Reserve Chair Janet Yellen said Wednesday that the
central bank could raise rates six months after its current
bond-buying program ends, suggesting a potential hike is
possible as early as spring of 2015.
    Demand for Treasuries will be tested this week, with the
Treasury due to sell $32 billion in two-year notes on Tuesday,
$35 billion in five-year notes on Wednesday and $29 billion in
seven-year notes on Thursday, in addition to $13 billion in
reopened two-year floating rate notes on Wednesday.
    Weak technicals are adding to pressure on the market, with
five-year notes breaking above support levels for yields of
around 1.72 percent, said Jim Vogel, an interest rate strategist
at FTN Financial in Memphis, Tennessee.
    "That has people nervous in front of supply on Wednesday for
fives," he said.
    Two-year note yields rose as high as 0.47 percent
on Monday, the highest since September and up from 0.34 percent
before Yellen's remarks. Five-year notes yields
increased to 1.77 percent, the highest since January 9 and
seven-year notes yields rose to 2.34 percent, the
highest since January 23.
    Benchmark 10-year notes fell 6/32 in price to
yield 2.77 percent, having risen from around 2.66 percent since
Yellen's comments.
    Short-dated bonds continued to underperform longer-dated
bonds as investors continued to exit from trades, betting that
the Treasuries yield curve would steepen.
    The spread between two-year notes yields and 30-year bonds
yields tightened to 315 basis points, the
smallest since July. That spread had widened to 367 basis points
in November.
    Corporate bonds spreads, meanwhile, have tightened even as
Treasuries sell off, reflecting that investors are continuing to
accept lower returns for higher risks as they seek out any
incremental yields offered in fixed income products.
    Investment grade corporate bond spreads narrowed to 1.20
percent over Treasuries on Friday, the lowest since 2007, while
high yield corporate bond spreads also fell to 3.76 percent,
near their lowest level since 2007, according to data by Merrill
Lynch.
    Corporate bonds have been among the favorite investments of
pension funds and other investors struggling to hit high return
targets in a low interest rate environment.
    The Fed will buy between $500 million and $750 million in
Treasuries due from 2024 to 2031 on Monday as part of its
ongoing purchases.
    

 (Editing by Bernadette Baum)
FILED UNDER: