Bond Yields Fall Despite Weak Auction
Treasury bond yields eased Wednesday after an action-packed session in which the market was startled by a Federal Reserve discount rate cut, weathered a poorly bid 10-year note sale and finished with a flourish of buying.
The price of the Treasury’s bellwether 30-year bond was up 3/16 point, or $1.88 per $1,000, by the market’s close. Its yield, which moves in the opposite direction from price, fell to 7.99% from 8.02% Tuesday.
Bond yields fell after the Fed cut the discount rate, the interest it charges commercial banks, by half a percentage point to 4.5%. Investors have been flocking to bonds in recent months, trying to lock in long-term yields as the Fed continues to push rates lower.
But the Treasury’s disclosure later in the day of disappointing results from its sale of 10-year notes sent bond yields rising again, before a late burst of buying reversed the situation.
The auction was the second leg in the government’s three-day sale of $38 billion in securities, a quarterly event to replenish government coffers.
Traders blamed poor bidding for the 10-year note partly on uncertainty among investors over new rules for government debt auctions. Some traders said investors simply aren’t finding bond yields attractive anymore.
The Treasury said the sale of 10-year notes produced an average yield of 7.53%, which was above the expected 7.51% to 7.52%. That meant that the government was forced to pay more than expected to raise the money.
In a sign of the poor response to the offering, the 2.1-to-1 ratio of total bids to the amount accepted was well below average, economists said. The Treasury said it received $24.1 billion in bids.
Kevin Flanagan, money market economist at Dean Witter Reynolds, said bond market watchers were surprised that bond prices didn’t remain depressed after news of the 10-year note sale, since it indicated weak demand for the securities. Similar trouble was evident at Tuesday’s auction of three-year notes, the first part of the refunding.
The late burst of bond buying may mean that “the dealer community or Wall Street might be trying to support the market,” given that such institutions own the overwhelming majority of the securities auctioned Tuesday and Wednesday. It wouldn’t be in their interest to drive down prices, he explained.
In addition, the intent in preventing a selloff may have been to keep from tainting the market for today’s auction of 30-year bonds, the final part of the refunding.
In the secondary market for Treasury bonds, short-term maturities rose 3/16 point to 5/16 point, intermediate maturities were up 5/32 point to 9/32 point, and long-term issues were up 3/16 point to 1/4 point, the Telerate Inc. financial information service reported.
The movement of a point is equivalent to a change of $10 in the price of a bond with a $1,000 value.
The federal funds rate, the interest on overnight loans between banks, dropped to 4.675% from 4.938% Tuesday. On Wednesday, the central bank was seen as lowering its target for the funds rate by a quarter-point to 4.75%.
