Treasury Bonds Pull Back, Hurt by New Debt Supply

By Min Zeng

Treasury bonds pulled back Monday, hurt by new debt supply this week.

In recent afternoon trading, the benchmark 10-year note was 5/32 lower, yielding 2.487%, according to Tradeweb. The 30-year bond was 8/32 lower, yielding 3.257%.

Bond yields rise as their prices fall.

"The weekend passing without a major escalation in any of the geopolitical fronts globally has allowed for the Treasury market to start to focus on supply," said Anthony Cronin, a Treasury bond trader at Société Générale SA.

A sale of $29 billion in two-year notes at 1 p.m. kicked off this week's $108 billion new Treasury note offerings.

The new two-year notes were sold at a yield of 0.544%, the highest since 2011.

The sale drew mixed results. Demand from foreign investors perked up--the indirect bid was 27%, the highest since March. But the direct bid, a group that includes bidding from U.S. investment firms, was 14.3%, the lowest since June 2013. Analysts said investors' appetites were tempered ahead of a two-day monetary policy meeting from the Federal Reserve that starts Tuesday.

Bond prices had strengthened earlier. An unexpected 1.1% decline in pending home sales raised concerns over how robustly the U.S. economy would grow this year, which boosted the allure of haven bonds.

The buying sent the 30-year bond's yield to as low as 3.228%. It marked the lowest level since June 2013.

The 30-year bond offers the highest yield in the U.S. government bond market. It also yields higher compared with counterparts in Germany and Japan, luring buyers seeking relative value.

The 10-year note's yield is near this year's low of 2.4% set during the May 29 session. The yield was 3% at the start of January.

An uneven pace of the global economy and geopolitical tensions in Ukraine and Middle East have boosted demand for U.S. government bonds this year, sending yields lower. U.S. bonds offer superior yields compared with Germany and Japan, also luring investors seeking relative value. China, the biggest foreign owner of U.S. government debt, has bought Treasurys this year in a bid to lower the value of the nation's currency to boost exports.

The Federal Open Market Committee is scheduled to release a statement Wednesday afternoon regarding the latest assessments on the economy and inflation, as well as its interest-rate policy.

Economists widely expect the Fed to announce another $10 billion reduction in its monthly bond buying, shrinking the purchases to $25 billion a month. The Fed has been cutting monthly buying since January. Policy makers have said the buying program, which has played a big role in keeping bond yields near historic lows to stimulate the economy, likely ends before the end of October.

A particular focus for bond investors is when the Fed is going to start raising its official interest rates.

Economists and investors expect the Fed won't raise interest rates until the middle of 2015. The Fed has held its key policy rate--the fed-funds rate--near zero since December 2008.

Analysts caution that the central bank could bring forward the timing of a rate increase if the U.S. economy accelerates or inflation concerns pick up speed.

Strategists at Goldman Sachs Group Inc., J.P. Morgan Chase & Co. and Morgan Stanley still expect the 10-year yield to rise to 3% by the end of the year. The argument to send yields higher is that the U.S. economy is gaining momentum while inflation pressure continues to tick higher, factors that could push the Fed to raise official interest rates earlier than many investors expect.

Write to Min Zeng at

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