US Treasuries prices fell on Friday and long bonds dropped over two points, as investors prepared for a heavy new issuance scheduled for the next week and a half. An agreement in Europe to a draft of a new treaty for deeper economic integration also dampened demand for safe haven debt as investors were encouraged that leaders in the region are working, even if slowly, to resolve their debt crisis.
The Treasury is expected to sell $177 billion in seven auctions spread over only eight trading days, kicking off on Monday with $32 billion in three-year notes. Many investors see US debt yields as needing to rise from current levels to lure enough buyers, and also expect the yield curve to steepen as the Treasury also sells $21 billion in 10-year on Tuesday and $13 billion in 30-year bonds on Wednesday.
"A lot of people are eyeing the supply that's going to start pummelling the market," said Suvrat Prakash, interest rate strategist at BNP Paribas in New York. "People are getting concerned and thinking that we're going to open up on Monday morning much higher in yields." Some dealers used Federal Reserve buybacks on Friday as a chance to sell bonds and free up room to absorb the new supply, Prakash said.
The Fed purchased $2.512 billion from $6.43 billion offered in its buyback of bonds due between 2036 and 2041 as part of its "Operation Twist," program, which is designed to lower longer-term interest rates. Fears over new contagion from Europe is likely to keep a bid for US bonds, even if yields increase somewhat to absorb the new sales, said Carl Lantz, interest rate strategist at Credit Suisse in New York.
The fiscal agreement between all 17 members of the eurozone and nine countries that aspire to join it helped spur renewed risk taking, and reduced the demand for safe haven Treasuries. The outcome of a two-day European Union summit, however, left financial markets uncertain whether and when more decisive action would be taken to stem a debt crisis.
Investors were disappointed on Thursday when European Central Bank President Mario Draghi poured cold water on hopes the central bank would implement a broad bond purchase program. Benchmark 10-year notes were last down 25/32 in price to yield 2.06 percent, up from 1.97 percent late on Thursday. Thirty-year bonds fell 2-3/32 in price to yield 3.10 percent, up from 3.00 percent.