US government debt prices fell on Wednesday as investors ventured back into stocks and corporate bonds, curbing Treasuries' safe-haven appeal. A tepid auction of 10-year notes added to pressure on Treasury prices, traders said.
Yields rose to their highest in nearly two weeks with Treasuries still under pressure from Tuesday's Federal Reserve statement expressing confidence in the US growth outlook, which hinted to bond investors that an interest rate cut might be further in the future than previously thought.
The Fed acknowledged the past month's volatility in credit markets but did not add to investors' jitters about recent sell-offs in riskier assets. At the beginning of the week, a Treasury market rally sent benchmark yields down to nearly three-month lows.
"It was not fundamentals driving it, but fear," said Andrew Richman managing director of SunTrust's personal asset management division, based in West Palm Beach, Florida. "Over the last couple of days, the Fed saying inflation is the primary concern and that it is not worried about lack of growth has people saying perhaps things are not as bad as they thought they were and money is going back into equities," Richman added.
The benchmark 10-year Treasury note was down 20/32 in price for a yield of 4.87 percent, compared with 4.78 percent late on Tuesday. Bond yields move inversely to prices.
Wall Street stock indexes rallied on Wednesday, with the Dow Jones industrial average ending up 1.14 percent. "Stock markets, China, supply are weighing on Treasuries. All the global equities markets have rebounded; that is taking away somewhat the flight-to-quality bid," said Mary Ann Hurley, senior Treasuries trader in Seattle at brokerage D.A. Davidson. "China's threat to the dollar would affect Treasuries as well."
A report in Britain's Telegraph newspaper said China was threatening to sell its huge US Treasury holdings if Washington imposes trade sanctions. But Treasury Secretary Henry Paulson, speaking on the CNBC financial television channel, said it was absurd that China would liquidate its holdings of US Treasury securities. Paulson added that China would like to increase its investment in the United States.
US government bonds extended earlier losses, moving to session lows, after a $13 billion auction of new 10-year notes generated somewhat tepid demand, with a bid-to-cover ratio of 2.30. Indirect bidders, which include foreign central banks, took about 32 percent of the auction, below recent averages.
A 30-year Treasury bond auction is scheduled for Thursday. The two-year note, which is particularly sensitive to market expectations for official interest rate moves, fell 4/32 in price for a yield of 4.65 percent, up from 4.58 percent late on Tuesday.
A Reuters poll on Tuesday showed that primary US government securities dealers expect the Fed to hold rates steady in September, but believe a cut could come in October.
Treasuries' sharp sell-off and stocks' leap on Wednesday was just one sign that investors' risk aversion was receding after the tumult that has punished riskier credit markets for much of the past month. The 10-year interest rate swap spread narrowed sharply - a sign risk aversion is ebbing - to 66.50 basis points late on Wednesday from 70.50 basis points late on Tuesday.
Tuesday's Fed statement signalled that the US central bank is "watching how things are unfolding in credit, but nobody is really in panic mode," said George Goncalves, chief Treasury/TIPS and agency strategist with Morgan Stanley in New York.
"Maybe we got ahead of ourselves, the front end of the curve is pricing in too much of a Fed ease too soon and we are seeing a giveback," Goncalves said. The 30-year bond's price fell 1-5/32 for a yield of 5.02 percent, compared with 4.94 percent late on Tuesday.