US Treasury debt prices bounced on Wednesday, dragging benchmark yields below 4 percent after a Fed official hinted at an eventual pause in rate hikes and investors absorbed the latest helping of new supply. In an early boon to bonds, Atlanta Fed President Jack Guynn told The Wall Street Journal the Fed might change the wording of its post-meeting statements. Traders interpreted that to mean the central bank was considering a break from its string of rate increases.
Success at the second leg of Treasury's refunding auction boosted market sentiment further as did plentiful interest in the $15 billion in five-year notes from indirect bidders.
That category includes customers of primary dealers and foreign central banks, but has become viewed mostly as a proxy of the latter in recent months.
"Those that thought the central bank buying would not be there for the auction have been proven wrong," said Andrew Brenner, head of fixed-income at Investec US "Those that thought the Chinese New Year would affect the bidding have also been proven incorrect."
The welcome surprise helped push ten-year notes 10/32 higher in price for a yield of 3.98 percent, down from 4.01 percent and under 4 percent for the first time since late October.
Indirect bidders picked up a solid 45 percent of the notes on offer, alleviating fears that foreign demand would fall.
The new five-year notes were sold at a high yield of 3.618 percent, which was lower than the market expected, and drew bids for 2.53 times the amount on offer.
The bid-to-cover ratio, a measure of investor demand, rose from 2.37 percent in January and was near the 2.59 percent average at the six previous sales.
The results raised hopes of another solid auction on Thursday, when the government will sell $14 billion in 10-year notes.
"The fact that even with supply coming into the market, we are maintaining these levels is very positive for the market," said Rich Volpe, head of Treasury trading at Bear Stearns. "I would imagine that we would have no problem taking down the 10-year supply at these levels."
Thirty-year bond prices were up 5/32 at a yield of 4.37 percent, similar to late Tuesday.
Two-year Treasury notes gained 5/32, yielding 3.24 percent, and five-year notes were up 12/32 in price for a yield of 3.58 percent, down from 3.66 percent.
In his interview with the Journal, Guynn said alterations to the Fed's statement might include dropping the words "measured" and "accommodative."
"We read any change in language as more likely to generate a slower pace of tightening than a speeding up in tightening to 50-basis-point increments," said Alan Ruskin, research director at 4CAST Ltd.
Fed Gov. Edward Gramlich later weighed the risks of inflation on the one hand and choking off growth on the other during a speech in Denver. "There are risks on either side - this is not the simplest thing in the world," he said.
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