Treasuries fall

US Treasury debt prices eased on Tuesday after lacklustre demand in an auction of three-year notes spurred some worries over the potential success of remaining debt auctions this week. Losses were limited, however, as minutes from the Federal Reserve's last policy meeting maintained the notion that the central bank will go ahead with another program of quantitative easing in the near future that many expect will include an expansion of Treasury debt purchases.
The government sale of $32 billion of three-year notes early in the afternoon brought a high yield that was above market expectations, indicating investors were unwilling to pay for the notes at the current historically low yields. "A terrible showing on the demand side in the three-year auction," said Thomas di Galoma, head of fixed income rates and trading at Guggenheim Securities in New York.
Three-year notes traded 3/32 lower in price to yield 0.56 percent, up from 0.53 percent late on Friday, while benchmark 10-year Treasury notes traded 8/32 lower to yield 2.43 percent, from 2.40 percent. The Treasury will auction $21 billion of reopened 10-year Treasury notes on Wednesday and $13 billion of reopened 30-year bonds on Thursday.
The Fed's release of minutes from its September 21 Federal Open Market Committee meeting did little to change expectations of further quantitative easing from the central bank, which many expect to be announced as soon as the early November policy meeting. The minutes outlined that in September Fed policymakers felt further monetary easing could be appropriate before long, and that among possible approaches the focus was on buying Treasuries.
"(Fed officials) noted that slow growth in and of itself is enough to warrant asset purchases and in this context the data since the meeting has done little to suggest anything other than near-term quantitative easing - the increasingly consensus view calls for a November 3 announcement," said Ian Lyngen, senior government bond strategist at CRT Capital Group in Stamford, Connecticut.
Most primary dealers think the Fed will announce its second round of easing measures directly following the November 3 meeting, a Reuters poll found on Friday. The increased speculation of more Fed asset purchases has recently supported Treasury debt prices and pushed yields down to historic lows.
Indeed, the two-year Treasury note's yield dipped to a record low of 0.34 percent on Tuesday. But the two-year note pulled back in price to trade 1/32 lower with a yield of 0.38 percent on Tuesday afternoon, from 0.36 percent late on Friday. Five-year and seven-year Treasury note yields also briefly hit record lows on Tuesday. The 30-year bond traded 1-1/32 lower in price to yield 3.81 percent, the highest yield in three weeks and up from 3.75 percent late on Friday.