Treasury Prices Inch Lower Following 5-Year Note Sale
May 10, 2011
U.S. Treasurys edged lower Wednesday, as investors greeted this month's offering of five-year notes with less-than-enthusiastic demand. The price of the benchmark 30-year bond was down 3/32, or nearly $1.25 for each $1,000 of face value, at 97 1/32 in late trading. The yield, which moves in the opposite direction from the price, rose to 6.98% from 6.97% late Tuesday. Treasurys began the day with slight gains stemming from overseas buying after the Bank of Japan's quarterly tankan survey of business sentiment showed a slump in a key manufacturing index. The report effectively reduced the odds for a Bank of Japan interest rate increase in the near term, observers said. The early gains faded rapidly as the market geared up for the second leg of the monthly Treasury auction: the sale of $12.5 billion of five-year notes. As with Tuesday's two-year note auction, demand was lackluster. Total bids received exceeded supply by a ratio of just 2.13, well below the average of 2.43 seen in the previous dozen five-year auctions. Noncompetitive bids -- which typically represent those from investors outside the Wall Street community -- reached $534 million, above the $382 million average. Observers noted that levels at this month's auctions may have been too rich for investors, who are growing increasingly anxious over the possibility of a Federal Reserve tightening next month. Since last week, yields have backed up dramatically on stronger-than-expected economic data and word that Fed policy-makers adopted a tightening bias at the July Federal Open Market Committee meeting. Despite the recent rise in yields, this month's two- and five-year note auctions still came in at rates below the previous month's. ``In plain language, the auction was not enthusiastically received,'' said Humberto Tejada, vice president of the fixed-income group at Aeltus Investment Management Inc. ``We're still not at levels that provide a lot of comfort if you think the Fed might have to do something in September.'' Indeed, investors have little appetite at current prices, considering the possibility of a rout next week. Key data for August will begin to come out next week, but the monthly employment report will probably determine the market's course for the next few weeks, traders and analysts said. Many players, they said, are growing skittish ahead of the employment report in light of persistently low levels in weekly jobless claims. Many economists have warned that jobless claims data in recent weeks hint at a strong August employment report. In other credit markets: In the corporate debt market, strong demand for airline debt pushed yield spreads tighter on the long-term debt of three major airlines. Municipal bonds were unchanged, as the price spread to Treasurys grew to levels not seen since early 2010. The mortgage-backed securities market saw four new offerings, worth a total of $810 million.
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