US Treasury debt prices fell on Monday, taking benchmark yields to their highest levels in over two months as investors worried about the market's ability to absorb a record $67 billion in new bonds just this week. Treasury issuance is expected to balloon to around $2 trillion this year alone.
This week's quarterly refunding sales, beginning with $32 billion of three-year notes on Tuesday, will be an early test of demand. Volatility was restrained on Monday by uncertainty surrounding the federal government's bank rescue plan, which would likely seal the near-term fate of equity markets and thereby also guide the path for Treasuries.
Treasury Secretary Timothy Geithner is expected to unveil a plan at 11 am on Tuesday that many believe will contain a mix of asset guarantees, purchases and capital infusions into banks. "It will be somewhat difficult to set up for the initial part of the refunding given the lack of certainty in the Treasury and administration proposals," said John Spinello, Treasury bond strategist at Jefferies & Co in New York.
Benchmark 10-year notes were down just 1/32 and offering a yield of 3.00 percent. At the peak of selling, yields reached 3.05 percent, a full percentage point above 50-year lows touched in December. It is not as if news on the economy has improved since that point. Indeed, reports on consumer spending and jobs have consistently gotten worse.
Yet Treasuries have come under pressure because of the sheer magnitude of the government's rescue efforts. Some analysts note that as a percentage of the total economy, the US debt burden is still relatively small by historical standards. Yet they usually point to World War Two as a precedent, despite the very different global standing of the United States following that conflict. With US banks at the epicenter of a global financial crisis, it is little wonder confidence in the world's largest economy has been shaken.
That was evident in a rally in Treasury Inflation Protected Securities, which were building in an increasing premium over Treasuries. TIPS spreads over benchmark Treasuries were at 1.33 percent, up about a quarter percentage point in just a week. Some of that was a technical reaction to new supply, but a budding inflation fear could not be ruled out.
"The market is a little nervous ahead of this record amount of Treasuries flooding the marketplace," said William Larkin, fixed income portfolio manager at Cabot Money Management in Salem, Massachusetts. The 30-year bond, which has often decoupled from the rest of the market recently, was the session's lone gainer, rising 27/32 for a yield of 3.66 percent.