US Treasury debt prices climbed on Monday, with investors favouring longer-dated securities despite a looming mountain of fresh supply in this week's refunding auction. Traders attributed much of the day's gains to stragglers who had taken short positions in bonds ahead of Friday's payrolls report, and were still getting squeezed out since the jobs data proved weaker than forecast. The latest job-fuelled retreat in yields had triggered some concerns that private investors and foreign central banks might stay away from the Treasury's $51 billion refunding sale.
"We are going into the auction without an auction concession," said Gerald Lucas, chief Treasury and agency strategist at Banc of America Securities, referring to the cheapening of securities that typically takes place before a sale.
"If the three-year sale is not so good, it could set a tone for the rest of it," Lucas said.
Treasury's quarterly refunding kicks off with $22 billion of three-year notes on Tuesday, followed by $15 billion of five-year paper on Wednesday and $14 billion of 10-year notes on Thursday.
Anxiety over the market's ability to absorb all this paper was only compounded after Federal Reserve Board Governor Edward Gramlich on Monday said it was unclear how long foreigners would remain major buyers of US debt.
For clues into foreign appetite for bonds, traders would keep a close eye on the indirect bidding figures for each of the auction's three legs.
The category includes offshore central banks as well as customers of primary dealers, but has recently become a sort of default proxy for foreign interest in Treasuries.
Gains in bond prices on Monday were concentrated in longer-dated maturities, with the 30-year bond racing over a full point higher and setting a positive tone for the overall market. Yields on the long bond had fallen to 4.43 percent, their lowest since mid-2003, from 4.49 percent on Friday and 4.58 percent just before last week's payrolls data. Benchmark 10-year Treasury notes rose 8/32 for a yield of 4.06 percent, down from 4.08 percent late Friday.
The rest of the curve was essentially stuck in neutral. Yields on two-year notes ticked up to 3.31 percent from 3.29 percent while five-year note yields edged down to 3.67 percent from 3.68 percent.
The disparity between short- and long-term debt helped shrink the spread between 10- and two-year notes to 75 basis points, its lowest since March 2001.
Recent auctions of two- and five-year debt drew only meager private demand, leading to talk that foreign central banks were losing their appetite for Treasuries.
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