Treasurys come off lows following auction

AP News
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Posted: Dec 28, 2009 5:43 PM

Interest rates rose Monday, but were down from their highest levels following a decent auction of two-year notes.

The yield on the 10-year Treasury note, which is used as a benchmark for interest rates on mortgages and other consumer loans, rose to 3.85 percent from 3.80 percent Thursday. The bond market was closed Friday for Christmas.

In late trading, the price of the 10-year note fell 11/32 to 96 4/32. Meanwhile, the yield on previously issued two-year note rose to 1.05 percent from 0.97 percent Thursday, while its price fell 5/32 to 99 14/32.

Trading was light as many investors were on vacation. The bond markets were closed for Christmas and will shut again on Friday for New Year's Day.

With fewer traders in the market, the Treasury Department was forced to raise its yield on the offering of two-year notes to entice buyers. The government sold $44 billion of the notes at a 1.089 percent yield.

The bid-to-cover ratio, a measure of demand was 2.91, slightly below a recent average of about 3.00. But the number of direct bidders, or investors who buy directly from the Treasury and not through a broker-dealer, was high. This was an encouraging sign, said Ian Lyngen, senior government bond strategist at CRT Capital Group.

"There was a lot of direct demand for the last week of the year," he said.

The Treasury will auction a total of $118 billion of debt this week, including $42 billion of five-year notes on Tuesday and $32 billion of seven-year notes on Wednesday.

Investors have worried this year that the market would struggle to absorb the massive supply of debt the government is issuing to fund its stimulus programs. But so far, auctions have been going relatively well.

Still, bond yields have been creeping higher in recent weeks due to the stream of improving economic data. A healthier economy means the Federal Reserve could be forced to raise interest rates sooner rather than later to ward off inflation. Short-term bond yields closely track the Fed's benchmark interest rate.

"There's currently momentum pushing the market toward higher yields," Lyngen said, adding that the yield on the 10-year Treasury could rise above 4 percent in the coming months. The yield stood at 3.20 percent at the end of November.

In other trading, the price of the 30-year bond fell 7/32 to 94 29/32. Its yield rose to 4.69 percent from 4.68 percent.

The yield on the three-month T-bill rose to 0.09 percent from 0.03 percent. Its discount was 0.10 percent.