US Treasury debt prices eased on Monday as a record size auction of 2-year notes added to fears that a rash of new government debt supply will dilute the bond market. But analysts said price moves were exaggerated by very thin trading volume in the holiday-shortened week, and emphasised that Treasury yields, which move inversely to prices, remained near the five-decade lows hit last week.
For those few dealers in the office on Monday, debt supply was on their minds. The Treasury auctioned $38 billion of 2-year notes in the afternoon, and another record-large auction of $28 billion of 5-year notes is set for Tuesday. With Treasury debt prices having marched relentlessly higher in recent months due to insatiable demand for lower-risk assets, analysts said the raft of new debt supply may eventually have to erode bond prices.
"There is very little liquidity in the Treasury market," said David Ader, head of government bond strategy at RBS Greenwich Capital in Greenwich, Connecticut, adding "we just had the record sale of the two-year note, and tomorrow we are getting the record amount of five-year notes - that is what you need to focus in on."
The two-year note traded 5/32 lower in price for a yield of 0.83 percent from 0.75 percent late on Friday, while the benchmark 10-year Treasury note traded 12/32 lower for a yield of 2.17 from 2.13 percent.
Benchmark yields were trading not far above their five-decade low of 2.04 percent hit last week after the Federal Reserve cut its key lending rate near zero as the economy sank deeper into recession. The record two-year Treasury note auction was "a pretty chunky size for the market to take down," said Mike Pond, Treasury and inflation linked strategist with Barclays Capital.
The steady drumbeat of news about the slew of debt the US government would have to issue, expected to amount to between $1.5 trillion and $2 trillion over the next year, is weighing most on the longest maturities, viewed as increasingly susceptible to fears that the boom in Treasuries may ultimately run its course.
The has flattened the Treasury yield curve, or the spread between yield on 2-year notes and 10-year notes, to about 134 basis points, or the lowest since late June. Five-year notes traded 10/32 lower for a yield of 1.43 percent from 1.36 percent late on Friday, while the 30-year bond traded 1-23/32 lower for a yield of 2.62 percent from 2.55 percent.