US Treasury debt prices stumbled on Tuesday, as worries about increased government borrowing to finance its massive bank rescue package led traders to pare their government bond holdings. The government announced a plan to invest $250 billion in US banks, which inspired a giant rally in equity markets around the world and slashed demand for safe-haven government debt.
But the stock surge fizzled, failing to extend the record run-up on Monday and renewing some safety bids for bonds. "It's a question of anticipated supply and the amount they need to finance these programs," said David Albrycht, who manages the $2 billion Virtus Multi-Sector Short Term Bond Fund in Hartford, Connecticut.
Treasury yields which move inversely to prices rose sharply after Monday's market close. The yield on US two-year notes, the maturity that typically attracts safe-haven buying, rose to a two-week high, while the yield on 10-year Treasuries broke above 4 percent for the first time since July.
While supply worries hurt bond prices, growing dread about a deep recession and poor quarterly results knocked stocks into negative territory after initial euphoria on the latest bailout measures faded, analysts said. Under the US Treasury plan, the government will buy preferred shares in qualifying financial institutions, with stakes in each limited to $25 billion.
US Treasury Secretary Henry Paulson said nine banks described as "healthy institutions" had agreed to accept government stakes. Two-year government notes were down 13/32 in price for a yield of 1.82 percent, up 22 basis points from late Friday, and 10-year debt was down 1-13/32 to yield 4.06 percent, up 18 basis points from late on Friday.