US Treasury debt prices fell on Thursday as uncertainty about when the Federal Reserve would stop raising interest rates curbed investor interest in the government's auction of 10-year notes.
The Treasury sold $13 billion of securities at a high yield of 5.140 percent and a bid-to-cover ratio - an indication of demand - of 2.53, compared with an average of 2.30 for auctions of new 10-year notes last year. Indirect bidders, including foreign central banks, took about 30 percent of the auction. That compares with an average 40.6 percent in 2005.
"Some people were probably looking for bargains, and they got what they bid for whether it was a bargain or not," said Ward McCarthy, managing director at Stone and McCarthy Research Associates.
Despite the respectable bid-to-cover ratio, the auction was "a complete disaster," said Chris Rupkey, senior financial economist at Bank of Tokyo/Mitsubishi.
In late trade, benchmark 10-year notes were down 6/32, yielding 5.16 percent - close to a four-year high and up from 5.13 percent on Wednesday.
The decline in bond prices came a day after the Federal Reserve raised interest rates for a 16th consecutive meeting and, while leaving the door open for a pause in the tightening cycle, did not rule out further increases.
Rupkey said buyers in the bond market appeared to have been pushed to the sidelines by two strong negatives regarding the central bank's policy stance no matter what that may be.
"Damned if they do, damned if they don't - that's what bonds are saying about Fed policy," Rupkey said. "If the Fed lifts interest rates another few steps, there is no value in bonds. But if the Fed pauses, the yield curve will steepen."
With the two-year note yielding 5 percent, the same as the Fed's new target for its overnight federal funds rate, two-year yields must go higher to offer any value, said William Sullivan, chief economist at JVB Financial Group.
Sullivan said the bond market lost further ground as investors focused on the auction's low level of indirect bidding, seen as a proxy for interest by foreign investors.
Analysts said that with the dollar's recent drop, foreign interest in dollar-denominated assets could be moderating.
"The auction results hint that foreign investors are beginning a retreat from dollar-denominated assets in general and Treasuries in particular," Sullivan said.
McCarthy, however, said there was no way of gauging the level of foreign demand from information available now.
"It's been a strange week, a week with two refunding auctions and a Fed policy meeting - and still remarkably light activity in the Treasury market," McCarthy said.
Bonds retreated even as government data showed retail sales rose a lower-than-forecast 0.5 percent in April following a 0.6 percent gain in March. Sales excluding autos also fell short, coming in at 0.7 percent against estimates of 0.9 percent.
Market strategists also cited some spillover from a sharp drop in German Bunds, whose yields hit 20-month-highs.
A majority of primary bond dealers believe the Fed is done raising interest rates, according to the latest Reuters poll, but a significant minority still see the central bank boosting rates further.
"They don't know if they will pause or continue, and we don't know," said 4Cast Ltd senior economist David Sloan.
Two-year notes ended flat and yielding 4.99 percent, while five-year notes dipped 1/32 and were offering a yield of 5.03 percent. The 30-year bond dropped 16/32 to yield 5.23 percent compared with 5.20 percent.
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