NEW YORK: US Treasuries' prices retreated on Tuesday before a 10-year note auction and ahead of a Federal Reserve policy statement that is expected to reflect little change in monetary policy.
The largest rise in US retail sales in five months, reported by the Commerce Department, reinforced the bond market's bearish cast, as did the fifth day in a row of the stock market gains, which dulled demand for safe-haven US government debt.
Before this afternoon's $21 billion US Treasury auction of 10-year notes and a Fed statement expected to closely resemble the one issued in January, the benchmark 10-year Treasury note was down 16/32 while its yield rose to 2.09 percent from 2.03 percent late on Monday.
David Ader, government bond strategist at CRT Capital Group in Stamford, Connecticut, linked the retreat to "the sheer weight of supply" and expectations that the statement from the Fed "won't be especially bullish." The data on US retail sales in February fit that characterization as well, analysts said.
The US Treasury sold $32 billion in three-year notes on Monday and after that auction, the market began to drift lower as traders started to set up for supplies of 10-year notes on Tuesday and 30-year bonds on Wednesday. The Treasury will sell $21 billion in reopened 10-year notes at 1 p.m. EST (1700 GMT) and $13 billion in reopened 30-year bonds on Wednesday. The auctions will settle on Thursday, March 15.
The $21 billion sale of 10-year notes constitutes the first reopening of the issue with a 2 percent coupon maturing 2/15/22 and will bring the issue's size up to $45 billion, said Cantor Fitzgerald Treasury strategist Justin Lederer in New York.
Pre-auction setups have pushed 10-year yields just above their recent high yield of 2.08 percent.
"Overall, the range on 10s has been very tight over the past few weeks" and for that matter, many months, Lederer said.
Barring a major turn of events, "the 1.90 percent to 2.08 percent" range on the 10-year yield that has prevailed "since early February - or a range slightly wider - will remain intact for the near future," he said.
With a when-issued yield of 2.09 percent, "today's auction is also setting up to be underwritten at the highest yield since October" when it was underwritten at 2.271 percent, Lederer said. Three of the past four 10-year Treasury note auctions (November, December and February) have stopped between 2.02 percent and 2.03 percent, he noted.
Ten-year yields at the upper end of their recent range, should create "decent demand" for the Treasury's sale of 10-year notes, Lederer said.
As for the Fed, markets expect the US central bank to steer a steady course on monetary policy, acknowledging recent improvement in job growth, while keeping the door open for further easing. The US central bank is due to release a statement at about 2:15 p.m. (1815 GMT).
In January, the Fed, worried about the economy's progress, said it did not expect to raise interest rates until at least late 2014. The Fed cut benchmark overnight rates to near zero in December 2008. It has bought $2.3 trillion worth of bonds to push other borrowing costs lower and stimulate growth.
The latest chapter in the tale of monetary policy easing has the Fed considering buying more bonds, while offsetting - or "sterilizing" - those purchases with short-term loans to keep the quantity of bank reserves in the system in check.
In four recent appearances before Congress, Federal Reserve Chairman Ben Bernanke disappointed some investors by barely mentioning the prospect of an additional round of bond buying so markets do not expect the Fed statement to mention them much more explicitly than they have been referred to already.
"There's a growing divergence between those expecting more Fed action going forward and those who think the economy is strong enough that more action won't be required," said John Canavan, market analyst at Stone & McCarthy Research Associates in Princeton, New Jersey.
But Canavan said even those who think the Fed will offer further monetary accommodation do not expect it to be announced in Tuesday's statement. At the same time, the Fed will change its statement as little as possible to assure the market that the possibility of more easing is not off the table, he said.
"That means that if they acknowledge signs of improvement in employment, they'd have to balance it with something on the more negative side in order to hold open all options," Canavan said.
"That will be a little more difficult for them to do in the current environment because after a pullback in the first quarter from a strong fourth quarter, most economists are looking for improvement from here over the next couple of quarters -- including the Fed," he said.
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