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Bonds dip ahead of 3-year note auction
NEW YORK - US government debt prices dipped on Tuesday as traders reduced their bond holdings in preparation for an upcoming $32 billion auction of three-year notes.
The early market decline was limited, with nagging concerns about Europe’s fiscal woes and a slowing US economy keeping Treasury yields hovering near their historic lows.
European politicians and policy-makers have not convinced investors they have a comprehensive plan to contain their debt situation that could spiral into a global crisis, analysts said.
Still the absence of negative news from Europe helped stabilize stock markets and the euro on Tuesday, curbing safe haven bids for US government debt, they said.
“From a risk perspective, we stepped back from the ledge here,” said Stan Shipley, bond strategist with ISI Group in New York.
Benchmark 10-year Treasury notes last traded down 2/32 in price at 102-3/32 with a yield of 1.52 percent, up 0.7 basis point from Monday’s close.
The 10-year yield is about 8 basis points above the level set on June 1, which was the lowest going back to the early 1800s, according to data gathered by Reuters.
On below-average trading volume, the 30-year bond was 4/32 lower at 107-21/32, yielding 2.63 percent, up 0.6 basis point from late on Monday.
Meanwhile, last Friday’s weaker-than-expected non-farm payrolls report and recent comments from Federal Reserve officials have raised expectations that the US central bank may be ready to embark on a third round of large scale bond purchases, dubbed QE3.
“We are seeing more Fed officials saying QE3 is making sense,” said Larry Milstein, head of government and agency trading at R.W. Pressprich & Co. in New York.
Three top Federal Reserve policymakers on Monday laid the groundwork for a third round of bond purchases, saying the US recovery was weak and unemployment far too high.
On Tuesday, St. Louis Fed President James Bullard said the euro zone debt crisis and disappointing growth in the United States and China are worrisome but US monetary policy is correct as it stands. Bullard, who is not a voting member of the Fed’s policy-setting group this year, was speaking at a forum in London.
In the current climate of rock-bottom rates, investor appetite for Treasuries has remained sturdy. This should provide support for this week’s $66 billion in combined coupon-bearing supply from the US Treasury Department, analysts said.
“They will probably go well, but there is no guarantee,” Shipley said. “The last set of auctions didn’t go so well.”
In “when-issued” trading, traders expect the three-year note issue that comes due in July 2015 to sell at a yield of 0.3620 percent. This was below the high yield of 0.387 percent cleared at the June auction.
The Treasury will announce the three-year note auction results shortly after 1 p.m.
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