US Treasuries mixed into auction, long-end rallies
Wed Jan 26, 2005 09:35 AM ET
By Wayne Cole
NEW YORK, Jan 26 (Reuters) - U.S. Treasuries were mixed on Wednesday, with short-term debt subdued before a $24 billion auction of new two-year paper, but longer-dated debt back in favor after a sell-off the previous session.
Treasury's sale of new two-year notes closes at 1:00 p.m. (1800 GMT) and traders were inclined to cheapen prices into the sale, both to attract private demand and to ease the pain should they be left with the bulk of the issue.
Traders were wary in case stocks sucked money away from bonds, just as they did on Tuesday, and equity futures (NDH5: Quote, Profile, Research) were pointing to a firmer start for Wall Street.
All this kept two-year notes (US2YT=RR: Quote, Profile, Research) down 1/32 in price, leaving yields at 3.23 percent from 3.22 percent late Tuesday.
In contrast, yields on the benchmark 10-year note (US10YT=RR: Quote, Profile, Research) dipped a basis point to 4.19 percent as investors toyed with fresh curve flattening trades after a burst of profit-taking on Tuesday.
Bets that longer-dated debt would outperform the short-end have been all the rage in recent weeks and, while the play has become crowded, it is still favored by many analysts.
"We remain committed to the flattening trade, and would use any re-steepening as an opportunity to get into the trade at better levels," said William Prophet, interest rate strategist at UBS.
Indeed, he was disappointed that Tuesday's steepening in the curve was so modest and, it seemed, short-lived. Early Wednesday, the spread between two- and 10-year yields had narrowed 2 basis points to 95 basis points and back toward 3-1/2 year lows around 90.
The renewed shift to longer-term debt benefited the 30-year bond (US30YT=RR: Quote, Profile, Research) which rose 15/32 in price, lowering yields to 4.66 percent from 4.69 percent. The five-year (US5YT=RR: Quote, Profile, Research) was stuck in the middle and held steady at 3.71 percent.
There were no U.S. economic data of note due on Wednesday, leaving the two-year auction as the only trading event.
The last sale in December did not go well, drawing bids for a relatively modest 2.0 times the amount on offer. Indirect bidders, a category that includes foreign central banks, also took a meager 33 percent of the sale, well below the 42 percent average of past auctions.
Still, yields at this auction are likely to be at their highest since mid-2002 and could prove attractive.
"The 3.25 percent level has been strong support for the two-year note and we expect the auction to be strongly bid," said Richard Gilhooly, fixed-income strategist at BNP Paribas.
He also saw a chance that investors would need the two-year notes to unwind curve flattening trades. Such trades involve investors selling short-term notes they do not have, thus to close the position they need to acquire notes from somewhere.
Gilhooly was also keeping an eye on rising oil prices.
"If oil prices break above $50, we would expect the two-year nominal area to rally, as the Fed is concerned that a renewed spike in oil could retard growth," he said.
With this in mind, a key indicator on Wednesday would be the U.S. Department of Energy's national energy inventory data. A smaller than expected build-up in stocks could see oil futures rise from the current $49.15 level.
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