MW: Treasurys mostly lower after Fed buyback, before auction
NEW YORK (MarketWatch) -- Treasury prices traded mixed Tuesday, with long-term prices edging lower, before the government sells a record amount of 3-year notes, the first of three big note and bond auctions this week.
Shorter-dated securities are being supported after the Federal Reserve made its one Treasury purchase operation this week.
Two-year note yields (UST2YR 0.91, 0.00, -0.44%) rose 1 basis point, or 0.01%, to 0.93%.
Bond yields move in the opposite direction of prices.
The U.S. central bank bought $4.95 billion in debt maturing in 2016 to 2019. Dealers submitted $14.486 billion in debt to the Fed. See results on Fed's Web site.
The last time the Fed bought from this maturity range, it purchased $7 billion in notes. The amount bought this time was predicted by many to be smaller as the central bank has slowed down its purchases to make the program last longer.
"We expect a little slowdown in the Fed's appetite following a gradual decline in the size of the latest open-market operations," said George Goncalves, chief fixed-income rates strategist at Cantor Fitzgerald.
The Fed has previously bought $276 billion in Treasurys from the market since March, according to Morgan Stanley, and said it expects to finish its $300 billion in purchases next month. The program was intended to keep a lid on yields, as they are the benchmark used for setting a wide range of corporate and individual loan rates, including mortgages.
On the heels of the long holiday weekend, yields on 10-year notes ticked higher to extend a steep increase seen last Friday, after the Labor Department said the U.S. economy lost fewer jobs than had been expected last month. Still, unemployment rose to a 26-year high. See full story.
"Despite the constant influx of new debt, the bond market has held up remarkably well as economic growth concerns beyond a near-term bounceback pervade the market," said Dan Greenhaus, chief economic strategist at Miller Tabak & Co.
Auctions on deck
Later Tuesday, the Treasury Department will auction $38 billion in 3-year notes (UST3YR 1.42, 0.00, -0.21%) , with bids due at 1 p.m. Eastern.
At last month's sale of 3-year notes, investors bid for 2.89 times the amount of debt being sold, according to Cantor Fitzgerald, one of the 18 primary government security dealers required to bid at auctions.
Indirect bidders, a class of investors that includes foreign central banks, bought a record 68.2% of the August sale.
"Given such a high watermark to compare against, we gather today's 3-year note will not be as strong as the August auction," said Cantor's Goncalves.
The proportion of auctions going to indirect bidders has jumped since June due to a change in how the Treasury tallies bids. In June and July, indirect bidders bought 43.8% and 54%, respectively, according to Cantor.
Longer-dated debt may also be under more pressure before the government sells $20 billion in 10-year notes on Wednesday as well as $12 billion in 30-year bonds (UST30Y 4.28, +0.02, +0.42%) on Thursday. Both sales are reopenings, meaning the debt sold will carry the same coupon and maturity date as debt sold last month.
While the rising amounts of Treasury auctions leave the government breaking its own records nearly every month, several analysts point out that the auctions have gone fairly smoothly and attracted sufficient demand from investors, including foreign central banks.
Part of that may be because there has been so little issuance of mortgage-backed securities and housing-agency debt, which are the closest competition for Treasurys. Besides Treasurys, the Fed has bought $816 billion in mortgage-backed debt, out of $1.25 trillion anticipated, and $122 billion of an expected $200 billion in agency debt.
"Even though Treasury supply rises apace, this supply comes at the 'expense' of other fixed-income supply," said William O'Donnell, head of Treasury strategy at RBS Securities. "New 2009 fixed-income issuance is barely running above 2007 levels so a better, long-term question for investors may be: 'Is there enough supply to sate the demand?'"
