US bond prices tumble

US Treasuries fell on Wednesday, with benchmark yields reaching their highest levels in a week on concerns over a surge of debt supply to finance the ballooning US deficit. Losses extended on Wednesday afternoon after tepid demand in a record-large auction of five-year Treasury notes fuelled fears that investors may not have sufficient appetite to swallow all of the new supply.
The drop in prices was limited, however, by the Federal Reserves debut purchase of government bonds, which is intended to boost government debt prices and sink yields. "The cross-currents in the Treasury market are very strong - you have weak fundamentals and mammoth buying by the Fed," said Jessica Hoversen, fixed income market analyst with MF Global Research in Chicago.
Benchmark 10-year Treasury notes traded 23/32 lower in price for a yield of 2.79 percent, up from 2.71 percent late on Tuesday. It was the fifth straight session of rising 10-year yields, taking them to the highest point since last Wednesday, when the Feds surprise announcement of its purchase program triggered the biggest one-day drop in yields in more than two decades.
Perhaps more telling, the market has now reversed more than half of that benchmark yield decline in a week. The Fed on Wednesday bought $7.5 billion in Treasuries maturing in the next seven to 10 years. It was the first such purchase in its $300 billion operation over a six-month span. Its next purchase, scheduled on Friday, will target debt maturing in the next two to three years.
A record large auction of $34 billion of five-year notes on Wednesday afternoon was met with below-average demand, surprising some investors who had expected a heartier welcome for the notes after strong demand in an auction of $40 billion of two-year notes on Tuesday.
The Treasury is set to auction $24 billion of seven-year notes on Thursday, bringing the weeks total issuance to a record large $98 billion. Concern over the burgeoning Treasury issuance to fund the governments costly stimulus package and bailout programs came to the forefront early in the day after poor investor showing at an auction of 40-year UK government bonds worth 1.75 billion pounds ($2.55 billion).
Two-year Treasury note yields traded at a yield of 0.97 percent on Wednesday, up from a high yield of 0.95 percent in the Tuesday auction, while 30-year bonds were 1-23/32 lower in price for a yield of 3.73 percent from 3.64 percent late on Tuesday.