An auction of two-year US government debt went well Tuesday, with investors diving into the short end of the yield curve even as supply continues to roll into the market.
The solid auction of $38 billion in two-years came on an otherwise dreary day for Treasuries in which the 30-year long bond lost more than a full point in price. The market continued to fall even after the auction.
Investors fetched a 0.665 high yield, with the bid to cover ratio, which represents the amount bid for each dollar auctioned, a healthy 3.33.
Foreign interest as measured through indirect bidding came in at 33 percent.
Still, the two-year note was off following the auction, down 3/32 to yield 0.64 percent after closing at 0.59 percent Monday.
The benchmark 10-year note, negative before the auction, was off 12/32 after to yield 3.04 percent, compared to 2.99 percent.
The 30-year bond was off 1-3/32 in price to yield 4.08 percent, compared to 4.02 percent.
A mixed stock market took the luster off safe-haven U.S. government debt, as strong corporate earnings pointed Wall Street toward its fourth consecutive advance. The S&P 500 traded above its 200-day moving average for the first time in more than a month before easing.
"Expect some consolidation around these levels (in Treasuries) with financials trading well both here and in Europe and earnings continuing positive," said John Spinello, chief fixed-income technical strategist at Jefferies & Co.
"A solid backdrop for further advances in the August period" with an 1140 target on the S&P 500 would keep risk assets well bid, putting safe-haven Treasuries on the defensive, he said. The S&P was at 1119 in early trade.
The Treasury will sell five-year notes Wednesday and seven-year notes Thursday.
From a technical perspective, Spinello advised selling 10-year notes when the yield moves to the 2.98 percent to 2.96 percent area and said buying could emerge when the yield moves to the 3.04 to 3.065 percent area and again at 3.10 percent.
Spinello said the 3 percent yield on the 10-year note was merely a psychological boundary. However, foreign buyers' resolve to buy on dips is "critical," he said.
DiGaloma said the benchmark 10-year Treasury note yield climbed above 3 percent as investors reallocated funds to riskier assets following better bank earnings in Europe.
The sell-off in Treasuries continued as investors revalued financial stocks and the broader equity market.
DiGaloma expressed some skepticism about the reallocation out of Treasuries into riskier assets, however.
"We see much of the earnings surge as more of a lack of optimism by forecasters rather than simply stellar performance," he said.
DiGaloma said financial firms profited as low short-term funding costs created high net interest margins.
"Those margins are now contracting as their funds charges converge on loan resets in a lower interest rate environment," he said.
In when-issued trade, the two-, five- and seven-year notes to be sold Tuesday, Wednesday, and Thursday, respectively, yielded 0.685 percent, 1.835 percent and 2.498 percent.
The economic report of most interest to bond investors Tuesday is the Conference Board's consumer confidence index for July, estimated to have fallen to 51.0 from 52.9, according to a Reuters poll.
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