US Treasury debt prices fell on Monday as bond traders took profits ahead of new supply of government bonds this week, cashing in on a recent rally that has been stoked by fears of a pending US recession.
Treasuries have rallied since the middle of last year, with the benchmark 10-year note's yield - which moves inversely to its price - falling more than 1.5 percentage points. But more investors now reckon the rally is running out of steam even though the Federal Reserve will likely cut benchmark US interest rates again.
"The consensus that is developing is pretty bearish on Treasuries given the trend down we have seen in absolute yield levels," said William Bellamy, director of fixed income, with Thompson, Siegel & Walmsley in Richmond, VA.
Even after the Federal Reserve's cumulative 125 basis points of rate cuts in late January, the fed funds target rate is still about 1 percentage point above the 2-year Treasury note yield, he noted. "People are becoming skeptical about whether it's sustainable," Bellamy said.
As a result and ahead of US government bond issuance this week, investors were taking profits in Treasuries, traders said. Benchmark 10-year Treasury notes were trading 14/32 lower in price for a yield of 3.65 percent from 3.60 percent late on Friday.
The 2-year note - which is particularly sensitive to expectations for Fed interest rate moves - was unchanged in price for a yield of 2.08 percent. Trade volume was quite muted on Monday following celebrations in New York City after the New York Giants upset the New England Patriots to win the Super Bowl on Sunday.
The market's weakness was also partly attributed to traders trying to push bond prices down ahead of a new supply of government debt later this week. "We have some supply ahead of us and supply has not been received all that well (lately)," said John Spinello, Treasury bond strategist at Jefferies & Co in New York.
The Treasury will auction $13 billion in 10-year notes on Wednesday and $9 billion in 30-year bonds on Thursday. Ahead of the auctions, traders were steepening the yield curve, moving to widen the spread of longer-dated bond yields over shorter maturities. The curve, or the spread in yield between 2-year notes and 10-year notes, rose above 155 basis points on Monday, the widest level since October 2004.
Although the economic data calendar is relatively thin this week, it will feature the return of Fed speakers who took a break from the speaking circuit last week in the blackout period surrounding the Fed's January policy meeting.
Among those speaking later in the week will be Dallas Fed President Richard Fisher, who was the lone dissenter in the Fed's January 30 decision to cut the recommended overnight lending rate between banks by a half percentage point.
The Fed cut the fed funds target rate to 3.00 percent last week in an effort to stave off a possible US recession and is widely expected to cut interest rates again at the next policy meeting in March. Earlier, bond prices were little affected by data showing new orders at US factories rose by a less-than-expected 2.3 percent in December, while orders rose 1.4 percent for all of 2007 versus a rise of 5.1 percent for 2006.