Treasuries rally

US Treasuries prices gained on Monday after a $35 billion auction of new two-year notes drew buyers with relatively high yields. The Treasury sold the two-year debt at a high yield of 0.74 percent and median yield of 0.72 percent. The yield was below where the notes had traded before the auction, at yields of 0.73 percent - their highest level since June.
The notes had breached technical support levels at around 0.69 percent to 0.70 percent. "Despite a relatively low-volume day, it performed very well," said Jim Golden, head of Treasury trading at Jefferies & Co in New York. Buyers were attracted to the new issue after days of weakness, in which the yields backed up to more attractive levels. "It makes sense that it performed very well because it cheapened up on an outright basis, it cheapened up on the curve and the new issue was priced cheap relative to the current issue," said Golden.
"On every analytic, it looked attractive. The only question was whether there were enough people around to actually put their bids in," he said. Two-year notes were last unchanged to yield 0.67 percent. The yield has risen from 0.61 percent a week ago. The US Treasury Department said earlier on Monday the auction would proceed after some traders had speculated the auctions might be delayed because of a winter storm that blanketed the north-eastern United States, including New York, in heavy snow.
The storm left many trading desks sparsely staffed while dealers were also seen to be hesitant to take on much new debt as they close their books for year-end. "It's very thin dealing conditions," said William O'Donnell, head of US Treasury strategy at RBS Securities in New York.
The Treasury plans to sell $35 billion in five-year notes on Tuesday and $29 billion of seven-year notes on Wednesday, with both auctions seen likely to be relatively smooth. "The five-year auction should go OK, though the seven-year might be a little bit harder because it's a bit richer on the curve relative to other issues," said Golden.
Five-year notes were last up 2/32 in price to yield 2.04 percent, down from 2.15 percent earlier. US benchmark 10-year Treasury notes rose 13/32 in price, with the yield falling to 3.34 percent, after earlier rising as high as 3.51 percent. Thirty-year bonds rose more than a point in late afternoon trading, and were last up 1-3/32 to yield 4.40 percent, from 4.53 percent late on Thursday.
Markets were closed on Friday for the Christmas holiday. The Federal Reserve is scheduled to resume its $600 billion buying program on Tuesday, which may further support the market. The US central bank will buy between $6 billion and $8 billion notes due 2013 and 2014.
In another positive sign for Treasuries, recent data showed that foreign central banks have recently increased their buying of US government debt, said O'Donnell of RBS. According to Federal Reserve data released on Thursday, overseas central banks' holdings of Treasury debt rose by $13.08 billion in the most recent week to stand at $2.625 trillion. "That is a developing positive that should help support the Treasury market ultimately," O'Donnell said.