Treasurys Slip as Investors Favor Stocks

Junk or Jewels? The Lowdown on High-Yield Bonds
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The commitment to a stimulative monetary policy reiterated by Federal Reserve Chairman Ben Bernanke favored riskier assets over safe-haven U.S. debt, sending U.S. bond prices lower on Wednesday.

The fear of imminent U.S. government spending cuts and uncertainty about Italian politics which sent U.S. bond yields to one-month lows earlier this week abated as investors favored stocks and took some profits in U.S. Treasurys.

"The basic story today was a return to risk on with a sharp increase in equities pulling the bid from Treasurys," said John Canavan, market analyst at Stone & McCarthy Research Associates in Princeton, New Jersey.

(Read More: Fed's Bernanke Stays the Course)

Fed Chairman Bernanke's semi-annual testimony to Congress, delivered on Tuesday and repeated on Wednesday with each day including a question and answer period, inspired the confidence in riskier assets.

Not only did Bernanke emphasize the benefits of the Fed's bond-buying program relative to its cost, he also noted the possibility that eventual sales of the bonds could be avoided, suggesting the securities could be held a little longer or allowed to run off, analysts said.

The cooling of the safe-haven bid that boosted Treasury prices and sent yields to one-month lows early in the week appeared to temper investors' interest in the U.S. Treasury's third coupon sale of the week.

An auction of seven-year Treasury notes drew demand that was slightly below average, said Justin Lederer, Treasury strategist at Cantor, Fitzgerald in New York.

(Read More: Italy Debt Auction to Show Cost of Political Crisis)

Still, a desire for safety could revive the bid for U.S. Treasury debt if automatic U.S. government spending cuts set for Friday are not avoided or quickly rescinded.

Such cuts would intensify the impact of the fiscal restraint that resulted from so-called "fiscal cliff" negotiations, talks that allowed a 2 percent cut in the payroll tax to expire.

The tax hikes that resulted from the fiscal-cliff event - which could hurt consumer demand and growth - combined with the spending cuts that would kick in if Washington cannot reach a deal to avoid them could prove "a significant hit on an economy that already is not going strong," said Srinivas Thiruvadanthai, director of research and managing director at The Jerome Levy Forecasting Center in Mt. Kisco, New York.

Because their consequences could be severe, Thiruvadanthai believes a way will be found to avoid the cuts in automatic U.S. government spending. If the cuts do go into effect, he said, they could leave the U.S. economy on the verge of recession by the end of 2013. That means 10-year U.S. Treasury yields, now at 1.90 percent, could head back down toward the lows of 2012 when a yield of 1.38 percent was reached on an intra-day basis.

Benchmark 10-year Treasurys were last down 5/32 in price, their yields at 1.90 percent compared with 1.89 percent late on Tuesday.

Thirty-year Treasury bonds slipped 13/32 in price, their yields rising to 3.10 percent from 3.08 percent late on Tuesday.

Data showing a jump in durable goods orders, excluding aircraft, was positive for riskier assets like stocks and negative for Treasurys, though the report elicited little overt reaction.

The Fed bought $5.02 billion in debt due 2017 on Wednesday as part of the central bank's long-standing effort to encourage economic growth with enough velocity to lower unemployment.