Mostly: Classical

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Bonds off highs after 5-yr auction
34% Indirect

Hedge fund speculation still weighing on yields

By Leslie Wines
Last Update: 1:54 PM ET May 11, 2005


NEW YORK (MarketWatch) - Treasury prices softened slightly Wednesday afternoon, as investors lightened their positions as they readied for a government auction of 10-year bonds the following day.



In afternoon trade the yield on the 10-year bond was 4.19%, above an intraday low of 4.17% but below the day's high of 4.23%. The yield on the 30-year bond was off its highs at 4.532%.

"Most of the day is done," said Kim Rupert of Action Economics. "Prices have gone up a good deal and people are just getting out of positions ahead of the 10-year auction."

An afternoon auction of new five-year notes, the second of three tranches of the Treasury's second-quarter refunding, was well-received.

"It's a good auction," said Rupert, noting that the sale produced a bid-to-cover - or bids made to bids received - ratio of 2.47%, which is considered average.

In addition, a full 34% of the bids were from "indirect bidders," a category that includes foreign central banks.

The indication of foreign central bank buying was cheered because of worries in recent months that these institutions have been moving away from bonds in order to diversify their reserves into euro-denominated assets.

The auction produced a high yield of 3.89%.

Treasury prices made strong gains in morning trade, benefiting for the second day in a row from investor nervousness about hedge funds.

Investors Tuesday and Wednesday have eschewed equities and sought stable government investments, due to fears that hedge funds suffered heavy losses due to the deteriorating debt quality at General Motor (GM: news, chart, profile)

Safe-haven interest was intensified further Wednesday by jolting news that the U.S. Capitol and White House were evacuated for 11 minutes after a scare apparently caused by a small plane that violated air space rules.

Shortly after the opening Wednesday, Treasury prices briefly fell due to unexpected news that the U.S. trade deficit narrowed 9.2% in March to $55 billion.

The monthly decline was the biggest since December 2001 and contrasted with an average prediction for a widening to a record $61.2 billion of economists polled by MarketWatch.

The trade deficit news briefly sparked selling because it reignited concerns that first-quarter gross domestic product data would be revised higher to show a stronger growth rate.

Fixed-income investors fear that strong growth could convince the Federal Reserve to lift rates more aggressively than its current program of incremental, half-point hikes.

However, those concerns paled next to the hedge fund worries.