US Treasury debt prices climbed on Tuesday as a solid auction of two-year notes encouraged bond bulls a day ahead of a Federal Reserve announcement that was expected to yield little in the way of new action. The week's $104 billion in new issuance started off with exceptionally strong demand for the $40 billion issue of two-year notes, including a record indirect bid.
"It was a Sally Field auction. They liked it, they really liked it," said John Canavan, analyst at Stone & McCarthy Research Associates in Princeton, New Jersey. The auction came in the wake of data showing sales of previously-owned homes in the United States were weaker than expected in May, pointing to a sluggish recovery from the severe economic recession and further bolstering bonds.
Benchmark 10-year Treasury notes added 10/32 for a yield of 3.65 percent, down four basis points. The auction results were solid, with overall demand at its highest in over two years and interest from indirect bidders, a loose proxy for foreign buying, coming in at an unprecedented 68 percent.
"The strength of today's auction does suggest a particularly strong buyside demand that I would suspect would also support tomorrow's auction, even if not to the same extent," said Canavan. That is not to say that there was no anxiety about the market's ability to swallow remaining sales of five- and seven-year notes on Wednesday and Thursday, particularly since issuance in these maturities will now be larger than last month.
Separately, traders feared that, amid growing worries about inflation, the Fed might signal an eventual exit from its unprecedented emergency lending facilities in its post-meeting statement. The Fed's two-day policy meeting concludes on Wednesday, and they are not expected to change interest rates.
This would not only signal a more sanguine view of the economy, but also a possible end to the Fed's role as a direct buyer of Treasuries, which has kept a floor under bonds. It would also pave the way for an eventual resumption of official interest rate hikes.
That moment had not yet arrived, as evidenced by the latest housing data. Existing home sales did rise in May, but the increase was smaller than expected - and driven in great part by foreclosure sales.
"It's a recognition of a stagnating economy," said Jessica Hoversen, fixed income market analyst at MF Global Research in Chicago. "It's naive to wish a swift recovery given this unprecedented downturn. The consumer is still highly deleveraged and companies are reluctant to hire." The Treasury's record volume of auctions this week are part of its enormous efforts to finance a rescue of the world's largest economy, with $2 trillion in new issuance expected this fiscal year.