Longer-dated Treasuries prices gained on Monday as investors continued to flock to high quality debt ahead of year end, though intermediate dated notes underperformed after a new sale of two-year notes saw tepid demand. The Treasury sold $35 billion in two-year notes, the first of three auctions this week. The government will also sell $35 billion in five-year notes on Tuesday and $29 billion in seven-year debt on Wednesday.
The new two-notes priced at a high yield of 0.24 percent, close to where the debt was trading ahead of the auction, though dealers had to absorb the majority of the sale as interest from indirect bidders was light. "It was mediocre," said Ira Jersey, interest rate strategist at Credit Suisse in New York. Traders said that demand for the debt may have also been dampened because of low volumes ahead of year-end and because the sales won't settle until January 3.
Five-year notes were last down 1/32 in price to yield 0.81 percent, up from around 0.80 percent late on Friday. Seven-year notes were up 3/32 in price to yield 1.29 percent, down from 1.31 percent. Longer-dated notes continued to benefit from demand for low risk assets as European fears weighed on markets, sending benchmark 10-year note and thirty-year bond yields to their lowest levels since October 4.
The debt is seen likely to rally further in the first quarter as heavy debt maturities due by European nations threatens to increase fears over the region. Credit Suisse sees 10-year note yields as likely to fall to around 1.50 percent, from 1.82 percent now, as European nations face heavy debt maturities in the first quarter and US growth likely slows. Benchmark 10-year yields also fell below technical resistance of 1.83 percent on Monday, which may clear the way for the debt to next challenge its more than 70-year low of 1.67 percent set in September, according to Credit Suisse' technical analyst David Sneddon.