US Treasury debt prices held firm on Tuesday, maintaining the previous day's strong gains as the market settled into a two-week break from this year's heavy schedule of bond auctions. The $2 trillion worth of Treasury debt issuance expected this year to pay for government bailouts of banks and the economy has weighed heavily on the market for months, especially during an onslaught of auctions in recent weeks.
However, investors are using the coming pause to reassess the market's direction. On Monday, benchmark 10-year notes staged their biggest rally since the Fed announced in March that it would start buying longer dated Treasuries.
"There is a feeling that with supply out of the way for two weeks and Treasury buy-backs continuing the technicals of the market will be good," said Carl Lantz, US interest rate strategist at Credit Suisse in New York. Prices on the benchmark 10-year note were up 1/32 on the day, pushing the yield down to 3.17 percent from 3.18 percent at Monday's close.
The 30-year bond, rose 10/32, pushing its yield down to 4.16 percent from Monday's 4.18 percent. Further support came from the Fed's latest bout of Treasury debt buying. The New York Federal Reserve bought $6 billion of Treasuries maturing between May 2012 and August 2013. Two-year notes, anchored by the Fed's pledge to keep short-term interest rates low for an extended period, were unchanged on the day, yielding 0.90 percent.
Tuesday's buying followed Fed purchases on Monday of $3.5 billion worth Treasuries maturing from 2026 to 2039, more than its previous $2.5 billion foray into the very long end of the market on March 30. It's all part of a $300 billion plan of buying that has lent support to a market that would otherwise be weighed down by supply.
Earlier, bond prices slipped after financial markets adopted an optimistic interpretation of comments delivered late on Monday by Federal Reserve Chairman Ben Bernanke. Bernanke offered an upbeat assessment of last week's bank stress test results.
A prognosis for a healthier banking system would tend to damp demand for safe-haven government debt and favour riskier assets such as stocks. Investors have also been attentive to any signs that the economy's rapid deterioration has slowed, paving the way for the recovery that many economists expect in the second half of this year.
Some economists said a Commerce Department report of a $27.58 billion US trade gap for March could signal first-quarter growth might have been slightly less weak than the 6.1 percent annualised contraction the department initially reported. "The report is a mild positive for Q1 GDP growth, on the order of shaving a couple tenths of a percentage point from the 6.1 percent annualised rate of decline," said economists at Goldman, Sachs in New York.