Bonds jump, three-year debt sale solid

The US Treasury debt market rallied on Tuesday as a Wall Street sell-off revived a safety bid for government debt, allaying some concerns over appetite at this week's government bond auctions. Alcoa Inc's worse-than-expected results and Chevron Corp's warning over fourth-quarter earnings unleashed heavy selling in stocks. Major stock indexes were down as much as 1.3 percent.
"So with today's stock market mini-meltdown taking place into the auction supply, supply woes were not a concern," said George Goncalves, head of fixed income rates strategy with Cantor Fitzgerald in New York. Moreover, China's surprise move to raise the level of required bank reserves ignited anxiety that this would threaten the global economic recovery, This step aiming to curb inflation in China intensified the appetite for Treasuries, analysts said.
Bond prices briefly came off session highs after a $40 billion auction of three-year notes, which is part of this week's $84 billion in government debt supply. "People keep coming back to the safety of Treasuries," said Patrick McCluskey, senior fixed income strategist with Wells Fargo Advisors in St. Louis. Benchmark 10-year Treasury notes last traded up 25/32 at 97-5/32, a tad below their session high of 97-8/32.
The yield, which moves inversely to price, fell to 3.72 percent, down 10 basis points from late Monday. The 30-year bond fared equally well on a yield basis, falling to 4.62 percent. The sharp drop in longer-dated yields, the biggest single-day fall in nearly a month, flattened the yield curve from its record steep levels set on Monday. The gap between two-year and 10-year notes shrank to 280 basis points from the record 288 basis points on Monday.
Supply will remain in the spotlight on Wednesday. The Treasury Department will reopen a prior 10-year note issue by $21 billion on Wednesday and an older 30-year bond issue by $13 billon on Thursday. In addition to overall demand, traders will monitor the indirect bidding for these long-dated maturities.
Indirect demand is a proxy of bidding from foreign central banks, a critical group of Treasuries buyers in recent years. Traders have grown worried that overseas governments would curtail their Treasury purchases due to the ballooning federal government deficit.