US Treasury prices rally

US Treasury prices rallied on Wednesday as crude oil's surge to new records above $123 per barrel exacerbated fears about economic weakness, weighing on stocks and reviving Treasuries' safe haven appeal. The bond market smoothly absorbed new supply via the $15 billion auction of benchmark 10-year notes, the biggest in four years, despite earlier fears that this sale might drag Treasury prices lower.
"People were negative on the Treasury market, thinking supply was going to break us down," said Ted Ake, executive director and head of bond trading with Mizuho Securities USA in New York. "But with equities falling this afternoon, after that the very short-term trade was short covering in Treasuries," Ake said.
In the market, the benchmark 10-year Treasury note's price, which moves inversely to its yield, rose 17/32 for a yield of 3.85 percent, versus 3.92 percent late on Tuesday. US stock indices fell on concerns that escalating energy costs might inflict more pain on consumers and cause the already enfeebled economy to deteriorate further.
The Dow Jones industrial average fell 1.6 percent to 12,813 points in late trade. The $15 billion auction of 10-year Treasury notes "went as advertised which in this environment is probably a good thing, especially since it's the largest auction we have had in four years," said Mary Ann Hurley, senior Treasuries trader in Seattle at brokerage D.A. Davidson.
Treasuries price gains were capped as inflation concerns continued to shadow bond markets after a top Federal Reserve official suggested the US central bank must be prepared to raise interest rates to quell rising price pressure. There will be a $6 billion re-opening of a prior 30-year bond issue on Thursday which will be another test of bond investors' tolerance for surging commodity price inflation and fears this is spreading into the broader economy.
The Treasury market may have some trouble absorbing the 30-year Treasury bond reopening, Ake said. Long dated bonds are particularly susceptible to inflation, which erodes bond values over time. Yet Wednesday's US economic data suggested inflation is in check for now, as the economy slows. Two-year notes were up 6/32 in price for a yield of 2.31 percent, versus 2.40 percent late on Tuesday. The 30-year bond's price was up 27/32 for a yield of 4.62 percent.