Treasuries end lower on weak auction, European optimism; 30-year bond yields 3.2%

By Cristal Cody

Prospect News, Oct. 12 - Treasuries dropped and sent yields to six-week highs as fears over Europe's debt fallout subsided and after the U.S. government saw weak demand for its auction of 10-year notes on Wednesday, sources said.

The benchmark 10-year Treasury note yield rose 6 basis points to end at 2.21%. The 30-year bond yield climbed 10 bps to 3.2%.

"Bonds are going out off their low levels," a source said. "The 10-year note auction was very sloppy."

The government auctioned $21 billion in a reopening of 2.125% 10-year notes on Wednesday at a yield of 2.271%.

"It came about 2.5 basis points behind where it was trading at the time of the auction," a source said. "It had a low bid-to-cover ratio and low direct bidders, but the major thing was the fact it came at much weaker levels than what the market was anticipating - 2.5 basis points is a lot."

Bidders offered to buy 2.86 times the amount of bonds sold.

Indirect bidders, which include foreign central banks, purchased 35% of the notes, while direct bidders, which include domestic money managers, bought 6.4%.

The sale of $32 billion of three-year notes on Tuesday also saw weaker demand.

The Treasury Department will auction $13 billion in a reopening of 3.75% 30-year bonds on Thursday in the final sale of the week.

"Because of the beating that the 30-year has taken in price, increase in yield, and because that is part of the curve that the Fed is targeting in its buyback program, it should go better," a source said. "We're at a 3.19% yield; that should lure in some buyers."

Also impacting bonds on Wednesday, the Federal Reserve released the minutes of the Federal Open Market Committee meeting last month, which showed concern over growth in the economy and "indicated that QE3 was still on the table," a source noted.

In other activity on Wednesday, the Federal Reserve sold $8.87 billion of notes due 2013 in the only Fed sale this week as part of the $400 billion Operation Twist bond buyback program.

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