US Treasury prices rally

Longer-dated US Treasuries gained in price on Tuesday on the back of heavy buying of mortgage-backed securities. When mortgage securities surge, driving mortgage rates lower, it often leads to a wave of prepayments that shortens the life of those bonds, forcing bond fund managers to add to holdings of longer-dated Treasuries to keep their portfolios in balance.
"The MBS market has rallied significantly today," wrote Tony Crescenzi, chief bond market strategist with Miller, Tabak & Co in New York in a research note.
"This is lowering the average duration of MBS portfolios. When duration levels fall, portfolio managers seek to add duration in order to keep their duration close to their portfolio's benchmark. This can be accomplished by purchasing Treasuries," Crescenzi wrote.
The benchmark 10-year Treasury note's price, which moves inversely to its yield, traded up 1-15/32 for a yield of 3.73 percent, versus 3.91 percent late Monday. Democrat Barack Obama led Republican John McCain in the polls going into Tuesday's presidential election, but an Obama victory might not allow much more upside for stocks and hence check any decline in bond prices, said John Spinello, Treasury bond strategist with Jefferies & Co in New York.
"The expectation is for Obama to become president, and I think the market has discounted that to some extent, especially the stock market," Spinello said, adding: "If McCain happens to upset I think the stock market would take that more positively and perhaps fixed income would sell off a little bit."
US stocks rose in an Election Day rally on Tuesday, as investors looked forward to the end of the uncertainty surrounding the long fight for the White House, and as energy companies' shares followed oil prices higher.
Bond traders also bought longer Treasury maturities more briskly than shorter maturities as so-called yield curve trades reversed, analysts said. Yet with the government's scheduled refunding announcement on Wednesday, the specter of hefty issuance could soon curtail Tuesday's government bond market rally, analysts warned.
Shorter-term debt's price gains were capped by continued signs of a thawing in short-term lending markets. Signs that those markets may be freeing up "was a little comforting for the risk-takers and takes away from the bid in Treasuries," said Spinello. "There is also a psychological supply overhang in the market because of all of the debt that is going to be coming."
Short-term Treasury bill rates - which move inversely to prices - moved up, with the 3-month bill at 0.49 percent, versus 0.45 percent late Monday. The 2-year Treasury note's price was up 4/32 for a yield of 1.38 percent, versus 1.45 percent late Monday. The 30-year Treasury bond rose more than two full points in price for a yield of 4.20 percent, versus 4.33 percent late Monday.