January 8, 2013 / 9:21 PM / 5 years ago

TREASURIES-Prices gain as higher yields reel in buyers

* Treasury auctions $32 billion in three-year notes
    * After selloff, higher yields attract buying
    * Fed buys $3.71 billion in notes due 2018-2019

    By Karen Brettell
    NEW YORK, Jan 8 (Reuters) - Prices for U.S. Treasuries
advanced on Tuesday as higher yields  drew in buyers and the
year's first sale of coupon-bearing Treasury debt saw strong
non-dealer bidding.
    The Treasury sold $32 billion of three-year notes 
on Tuesday at a high yield of 0.385 percent, just about where
the market had expected. 
    The high direct takedown in this and the previous three-year
auction could signal "a shift in investor bidding patterns at
auctions, where buyers bypass dealers and go straight to the
Treasury, while still able to clear the auction near the WI
(when issued) levels," wrote Nomura analysts after the sale.
    Treasuries held gains after the sale. 
    U.S. government debt sold off sharply last week after
lawmakers agreed to a deal to avoid a package of automatic tax
hikes and spending cuts, the so-called fiscal cliff, that could
have pushed the world's biggest economy back into recession.
    Investors are also weighing whether the Fed might end its
bond purchase program before year-end, after minutes from the
Fed's December policy meeting released last week showed growing
unease on continuing the buybacks.
    The higher yields are likely to help demand for $66 billion
in new debt sales this week.
    "The recent back-up creates a buying opportunity," said Sean
Simko, portfolio manager at SEI Investments in Oaks,
    The Treasury will sell $21 billion in 10-year notes on
Wednesday and $13 billion in 30-year bonds on Thursday.
    Benchmark 10-year Treasures were last up 10/32
in price to yield 1.866 percent, down from 1.90 percent late on
Monday but up from around 1.70 percent at year-end.
    Thirty-year bonds gained 22/32 in price to yield
3.065 percent, down from 3.10 percent on Monday, and up from
2.87 percent at year-end.
    Market talk that France's sovereign debt rating was about to
be downgraded also lifted Treasuries' safe-haven appeal. A
senior French official told Reuters the rumor was "erroneous."
    "The initial jump was on the rumor of the French downgrade,
but now there is decent buying going on," said Charles Comiskey,
head of Treasuries trading at Bank of Nova Scotia in New York.
    With no large economic indicators on the horizon, Treasuries
are expected to stay largely range-bound, albeit in a higher
yield range after the past week's push.
    The market's next focus is likely to be a new round of
wrangling in Washington where lawmakers face tough battles on
how to cut spending and reduce the deficit, as the country also
pushes up against its debt ceiling.
    "People are focusing back on the bigger picture, we still
have the debt ceiling in front of us, we still have growth but
albeit at a slower pace than everybody would like," said Simko.
    The Fed bought $3.71 billion in notes due 2018 and 2019 on
Tuesday as part of its latest quantitative easing program, meant
to stimulate hiring by reducing long-term borrowing rates.

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