US Treasury debt prices slid on Friday on concern about huge supply due to costly government steps to stabilise the banking system and the economy. In addition, more efforts to stabilise the banking system and news that the Federal Deposit Insurance Corp has proposed extending its temporary guarantees of debt issued by banks tempered the bid for safe-haven US government debt, analysts said.
Treasuries erased some losses when stocks unravelled earlier gains that had crimped the safety bid even more. "With the new talk of fiscal stimulus and more government funds being committed to other financial institutions, Treasury investors are now more worried more about big deficits and the large supply of bonds," said Gary Thayer, senior economist at Wachovia Securities in St. Louis.
But even with a boost from lower stock prices, supply concerns weighed on the market. "When stocks moved lower, Treasuries came off the high yields of the day," said Chris Rupkey, chief financial economist at Bank of Tokyo/Mitusibishi UFJ in New York. "But Treasury yields would be down on the day as well if not for the concerns about supply."
With the Treasury market set to close at 2 pm (1900 GMT) before a three-day holiday weekend, the benchmark 10-year Treasury note's price was down 1-2/32, its yield having risen to 2.32 percent from 2.20 percent late on Thursday. The 10-year note yield fell to a five-decade low of 2.04 percent in mid-December. US government steps to stabilise the financial system have the potential to let the safety bid for US government debt wane over time, analysts said.
"There's no particular reason for 10-year Treasury yields to trade below 2 percent as long as we have very aggressive monetary and fiscal stimulus," said Dominic Konstam, head of interest-rate strategy at Credit Suisse in New York, who said the 10-year yield would likely trade between 2 percent and 2.5 percent for a few months and then move higher.
Konstam noted the $20 billion capital infusion the government will make in Bank of America but said the FDIC's plan to extend the guarantees on bank debt issuance to 10 years instead of the originally proposed three years was a much more significant development.
"The main thing was not just that there is more money for the TARP program and a backstop on bad assets, but that there is a plan to extend the FDIC guarantee for bank debt issuance to 10 years from three," Konstam said. "That's very positive for bank debt," he said. "It falls into the category of more fiscal stimulus, shoring up bank lending, and keeping asset prices relatively stable."
A sharp drop in shares of Barclays and other UK bank stocks hurt US stocks and also helped to lift safe-haven US Treasuries from lower price levels at mid-session. Thirty-year Treasury bonds were down 15/32 in price, their yields rising to 2.89 percent from 2.87 percent late on Thursday. Two-year Treasury notes were unchanged, yielding 0.73 percent.
Jamie Jackson, portfolio manager at RiverSource Investments in Minneapolis, with $90 billion of fixed-income assets under management, said investors were making some distinction between banks that are getting help and guarantees from their governments and those that are not. "On the debt side there is fear of more issuance from banks that can be done with a government guarantee. That puts banks without those guarantees at a disadvantage," Jackson said.