The US government could find fewer buyers for its debt next week, as investors deem the rock-bottom yields on Treasuries less appealing than stocks, gold and other risky assets. Prospects of a second round of quantitative easing from the Federal Reserve to help the economy have driven short-dated and intermediate yields to record lows this week.
-- Ultra-low yields may curb bidding for $66bn in supply
-- QE2-driven bond gains seen ready to consolidate
Friday's surprise drop in non-farm payroll jobs in September exacerbated the trend. Until the Fed's next policy meeting on November 2-3 - at which traders widely anticipate it will decide on "QE2" - the upcoming three weeks may be ripe for the Treasuries market to take a breather, investors said on Friday.
"The market needs to consolidate for next week's supply," said Derrick Wulf, portfolio manager at Dwight Asset Management in Burlington, Vermont. The US Treasury plans to sell $32 billion in three-year notes on Tuesday, $1 billion less than a month ago. This will be followed by a $21 billion auction of 10-year notes on Wednesday and a $13 billion 30-year bond sale on Thursday. The 10-year and 30-year sizes match the offerings in September.
On Friday, the three-year yield touched below 0.50 percent for the first time ever, while the 10-year yield fell to 2.33 percent, its lowest in more than 20 months. The US bond market will be closed on Monday for the Columbus Day holiday, while stocks and other US markets will be open.
As the debate on QE2 rages, it will like have to share the stage with the Treasury auctions and key government reports on inflation and retail sales next week. Economists predict core inflation will remain tame and consumer spending sluggish, which would be supportive for the Fed to pursue further policy easing.
"Supply could be a key driver as will data and bets on quantitative easing," said Greg Faranello, head of global markets trading and treasury with Espirito Santo Investment in New York. Until the Fed acts, Faranello and Wulf said it would be tough for bonds to rally much further. At the same time, traders will likely reduce their Treasuries holdings to make room for next week's coupon-bearing supply.
After solid demand in the last round of auctions worth $100 billion two weeks ago, there is no guarantee that the intensity of bidding will re-emerge, in particular among indirect bidders, which include foreign central banks and large fund managers.
"Positions are long. Expectations for QE2 is very high and valuation is very rich," Wulf said. "This may create some sticker shock." Still analysts said Japan and Asian central banks have been heavy buyers of Treasuries to curb the rise of their currencies against the dollar in a bid to help their exporters.
Since Japan's first intervention in the foreign exchange market last month, foreign central banks' holdings of Treasuries have grown by nearly $100 billion to $2.501 trillion as of October 6, according to Fed data released late Thursday.
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