Treasury Bond Yields Pull Back

Yields on Treasury securities tumbled Wednesday as certain technical selling eased and traders were happy to learn that the federal government next week won’t issue as much debt as expected.

It was a relief for battered bonds after five days of relentless selling and a six-week losing streak that catapulted yields, which move in the direction opposite of prices, up almost 1.5 percentage points.

So dramatic was the recent bounce in interest rates that bond bears had started to worry that it could threaten the health of the economic recovery by curbing demand for housing, one of the few booming sectors.

On Wednesday, the yield on the benchmark 10-year T-note fell to 4.31% from 4.44% on Tuesday, which had been the highest in a year.

Yields have been pushed up since mid-June by signs of economic acceleration, waning worries about deflation, some investors’ shift from bonds to stocks and by technical trading strategies. One strategy calls for investors to sell Treasuries to hedge their losses on mortgage-backed bonds as market yields rise.

Though some investors and traders continued to dump securities Wednesday, for a change the selling was met with solid buying from big market players on the West Coast and in New York, analysts said.

“Once word got out that those smart-money guys were in buying, it kind of gave the green light,” said Woody Garavente, a trader at Nomura Securities. “That was helped by the [Treasury] refunding package not being nearly anywhere as big as people thought.”

The Treasury said it would auction $60 billion in new notes next week. That would be a record sum, but it would be short of market estimates of $64 billion.

The sale will be in three parts: $24 billion in three-year notes, $18 billion in five-year notes and $18 billion in 10-year notes.

The new debt is part of the government’s effort to finance a widening budget shortfall that may rise to $455 billion this year, by some estimates.

Despite the lower-than-expected auction calendar for next week, a Wall Street panel that advises the Treasury on its borrowing requirements said the government might have to consider reviving its 30-year bond.

But Brian Roseboro, assistant Treasury secretary for financial markets, said there was “no need” to bring back auctions of 30-year bonds.

The possibility of new 30-year auctions wasn’t enough to dampen demand for the bond Wednesday. The yield fell to 5.25% from Tuesday’s close of 5.33%.

The yield on the 2-year note fell to 1.63% from 1.70%.

Many bond investors still are nervous ahead of key economic data due this week.

The data include the Chicago and New York purchasing managers’ reports Thursday, and the government’s July employment report Friday.

The market “has limited upside until those things are past,” said Michael Cloherty, fixed-income strategist at Credit Suisse First Boston.