Treasuries decline

US Treasury debt prices ended lower on Tuesday as a rally on Wall Street caused traders to pare bond holdings and erased earlier gains driven by bets the Federal Reserve will launch a new stimulus plan to help a flagging economy. Despite the late pullback, traders anticipate solid bidding at Wednesday's $35 billion auction of five-year Treasuries after good demand at a $35 billion two-year note sale on Tuesday.
"They were taking some of the risk-off trades off," said Tom Connor, president and chief investment officer at Pierpont Securities in Stamford, Connecticut. Bond losses were mitigated by disappointing US data on new home sales and central Atlantic factory activity, which fuelled expectations that the US central bank could engage in another round of quantitative easing.
Many traders are hoping Fed Chairman Ben Bernanke, in a speech on Friday at a central bank conference in Jackson Hole, Wyoming, will signal more central bank stimulus in order to avert another recession. "Everything is focused on the setting up for Friday. It's all about what Bernanke will say," said Brian Rehling, senior fixed-income strategist at Wells Fargo Advisors in St. Louis, Missouri.
Bernanke will speak at 10 am EDT (1400 GMT) Friday on the economy at an annual conference sponsored by the Kansas City Fed. A year ago, at the same event, he signalled a $600 billion Treasuries purchase program, known as QE2, aimed to avert deflation and to stimulate investments and spending.
A growing number of analysts predict that Bernanke could introduce a scheme for the Fed to extend the maturity of its Treasuries holdings by buying longer-dated Treasuries. This would narrow the difference between short- and long-term interest rates with the goal to spur lending and asset values.
News of an earthquake centred in Virginia that shook large parts of the US East Coast fuelled a fresh wave of safe-haven bids for bonds in early afternoon on Tuesday, sending longer-dated Treasuries prices briefly to session highs. Bond prices retreated after reports that there was no major damage from the quake.
Two-year notes last traded down 1/32 in price for a yield of 0.22 percent, up 1 basis point on the day and about 5 basis points above its record low set on August 10. The newest two-year notes sold on Tuesday cleared at 0.222 percent, the lowest ever at an auction for this maturity.
Benchmark 10-year Treasury notes were last down 13/32 in price for a yield of 2.16 percent, up almost 5 basis points from late on Monday. The 30-year Treasury bond was down 1-10/32 to yield 3.49 percent, up 7 basis points on the day. On Wall Street, major stock indexes rose at least 3 percent. The recent intraday swings in the Treasuries market will likely make investors wait shortly before the auction deadline at 1 pm EDT to submit their bids, traders said.