Longer U.S. bonds balk at looming issuance binge

By Pedro Nicolaci da Costa

NEW YORK (Reuters) - Longer-dated U.S. Treasuries retreated on Monday as investors wondered how well the market might absorb the swath of fresh supply needed to meet the government's rising need to borrow in a time of crisis.

Traders expect as much as $2 trillion in new issuance over the coming year. The more immediate concern was the $46 billion in debt coming this week alone.

The market was also suffering from the effects of the Federal Reserve's efforts to revive the mortgage finance business through purchases of mortgage-backed securities.

Benchmark 10-year notes eased just under a full point in price, and were offering a yield of 2.47 percent, up 11 basis points from last week. The 30-year bond yield broke above 3 percent for the first time since mid-December.

"There's concern over the stimulus package, the growing budget deficit, the need to finance that," said T.J. Marta, fixed-income strategist at RBC Capital Markets. "Then you've got the Fed coming in buying, so real money is rolling out of Treasuries and into mortgage-backeds, piggy-backing on the Fed."

In a policy shift, U.S. President-elect Barack Obama plans $310 billion in tax cuts as part of a rescue package of up to $775 billion, senior Democratic aides said Sunday. Funding for such measures will inevitably take the form of greater Treasury issuance, analysts said.

Dealers also expressed some fear that foreign buyers of Treasuries in Asia, including the central banks of China and Japan, might reduce their holdings in the medium-term as they burn through their dollar reserves to address the crisis.

"The back-up in yields shows a growing sentiment toward questioning the lower rate environment we are in right now," said George Goncalves, chief Treasury/TIPS and agency strategist with Morgan Stanley in New York.

A late-afternoon sell-off in the stock market helped Treasuries recoup some of their losses and boosted buying at the short-end of the yield curve. Two-year note yields fell to 0.78 percent, down from 0.83 percent on Friday. The Dow Jones industrial average was down 1.4 percent.

The auctions coming up this week include $16 billion in reopened 10-year notes and $30 billion in three-year notes.

Jobs data on Friday could help bonds regain some of their strength, particularly if the drop in employment exceeds already grim expectations for the loss of half a million jobs.

(Additional reporting by John Parry; Editing by Leslie Adler)