Seven-year auction the last of $2.183 trillion to be sold this year
By Deborah Levine, MarketWatch
NEW YORK (MarketWatch) -- Treasury prices mostly turned lower on Wednesday, pushing yields up modestly in quiet trading, after the Chicago purchasing managers index, which measures business activity in the region, improved in December, while many analyst expected a slight decline.
Bonds maturing in 7-years or fewer had been up slightly before the data the government gears up to sell 7-year notes in its last auction of the decade.
Yields on benchmark 10-year notes (UST10Y 3.79, 0.00, -0.05%) inched up 1 basis point to 3.80% after being lower in earlier trading. A basis point is 0.01% and yields move inversely to prices. On Monday, the yield closed at the highest level since August.
Yields on 2-year notes (UST2YR 1.08, +0.00, +0.37%) fell 2 basis points to 1.08%. On Tuesday, the yield closed at 1.10%, the highest in four months.
Bond markets will close early on Thursday and remain shut on Friday for New Year's Day. Japan will also be closed Thursday.
The Chicago PMI index rose to 60.0, the highest in 16 months, from 56.1 in November, according to media reports. Readings over 50 indicate more firms said business is getting better than said it was worsening.
The Treasury Department will take bids on the $32 billion in 7-year debt until 1 p.m. Eastern time. See results on Treasury's Web site.
"In the past year, the 7-year has managed to have strong auctions with the market in rally mode, and today should prove a repeat," said George Goncalves, chief fixed-income rates strategist at Cantor Fitzgerald, one of the 18 primary government-security dealers that are required to bid at auctions.
The auction will be the third and final note auction of the week. The market rallied on Tuesday after the 5-year note (UST5YR 2.62, 0.00, 0.00%) sale, with traders citing relief at simply finishing the two bigger sales in a holiday-shortened week with thin trading volume. See Tuesday's Bond Report.
Still, investors will closely watch how much of the auction goes to indirect bidders, a group that includes foreign central banks, which have bought large proportions of 7-year note sales. Indirect bidders bought an average of 61.2% of the sale. Direct bidders -- investors buying for their own accounts -- took another 5.4% on average.
The proportion of auctions going to direct bidders has risen notably in recent months, probably in part because of a change in June to how bids were tallied. The amount going to indirect and direct bidders is important because the more they buy, the less that primary dealers take and have to resell into the market, putting pressure on prices.
In the last four sales of 7-year notes, investors bid for an average of 2.74 times the amount of debt offered.
Yields on the current 7-year note rose 2 basis points to 3.32%.
The 7-year note was reintroduced in February, after a 16-year absence, as part of the government's plan to spread out its mounting debt-issuance needs. The U.S. has sold a total of $2.183 trillion in notes, bonds and inflation-indexed debt in 2009, according to CRT Capital Group.
Some analysts were also encouraged after the past two auctions that despite a sell-off since Dec. 18, yields on 2-year and 10-year notes failed to break through key support levels.
"It's hard to draw too many conclusions from light volumes and thin trading; it was an encouraging sign nonetheless after a week of selloffs in the Treasury market," strategists at RBS said.
