FinancialAdvisor's College Class (FACC)

[FinancialAdvisor]

Treasuries weaken as auction draws meager interest

Treasuries weaken as auction draws meager interest
Thu Feb 24, 2005 01:45 PM ET
By Pedro Nicolaci da Costa

NEW YORK, Feb 24 (Reuters) - U.S. Treasuries dipped on Thursday as tepid interest in a short-term debt auction rekindled fears of waning demand from foreign central banks.

Indirect bidders, including customers of primary dealers and foreign central banks, picked up just $7.35 billion or 31 percent of the whole issue.

The sale of $24 billion in new two-year Treasury notes went at a high yield of 3.498 percent. It drew bids for 1.93 times the amount on offer, below the already modest 2.01 achieved at the last sale and below last year's average of 2.2.

"There's nothing positive to be said about it," said Andrew Brenner, head of fixed income at Investec U.S. "What's happening now is foreigners are looking to buy higher yielding paper, including agency and corporate debt."

Earlier this week the market was unsettled by reports the Korean central bank was planning to diversify its, mainly dollar, portfolio thought the bank later played down the talk.

Still, Brenner, citing those institutions' constant need for liquidity, said concerns about a wholesale withdrawal from U.S. assets by foreign central banks was overdone.

Overseas central banks hold around $1.07 trillion of Treasuries, or more than a quarter of the entire market, so investors are sensitive to any hint of softening demand.

Earlier in the session, traders had gotten back to the old game of flattening the yield curve, in essence betting that long-term debt would outperform short-term debt as official interest rates climb.

But even longer-dated maturities caved to the selling trend after the auction soured sentiment.

Benchmark ten-year notes (US10YT=RR: Quote, Profile, Research) inched 1/32 lower to yield 4.27 percent, while five-year notes (US5YT=RR: Quote, Profile, Research) lost 3/32 for a yield of 3.89 percent from 3.86 percent. The 30-year bond (US30YT=RR: Quote, Profile, Research) was clinging to a tiny gains of 1/32 for a yield of 4.66 percent.

Economic data released by the government earlier in the session had only a passing effect on the market. Durable goods figures were soft at first glance but a closer look at the report's components revealed a rosier outlook for business investment, a negative for bonds.

"Businesses continue to ramp up their business spending," said Mark Zandi, chief economist at Economy.com.

Also detrimental were jobless claims figures which, while rising a bit from last week, remained low enough for investors to predict that February brought improved labor market conditions.

"The weekly jobless claims not too far above 300,000 is consistent with net job creation of 200,000 a month," said Zandi. "Next week's employment report should be strong, likely at around 250,000."


LINK: http://www.reuters.com/financeNewsArticle.jhtml?type=bondsNews&storyID=7731122