U.S. Treasury debt prices slipped on Wednesday on news of stronger-than-expected retail sales in February, but nearly all the day's losses were erased after the Treasury's sale of 10-year notes drew strong demand.
The robust retail sales followed other data showing improved employment growth and housing sector gains that support demand for riskier assets at the expense of safe-haven U.S. debt.
But the strength of the Treasury's 10-year note auction showed the powerful draw of higher yields.
"The 10-year auction was very strong with demand from a wide variety of non-dealer bidders,'' said Jake Lowery, Treasury trader at ING Investment Management in Atlanta, Georgia. "The 2.05 percent yield at the bidding deadline was very close to the recent highs in yield and presented an opportunity to market participants who had been starved for yield for some time.''
Foreign central banks, large fund managers and other indirect bidders on Wednesday bought their biggest share of a $21 billion U.S. 10-year Treasury note offering since Dec. 2011, according to data released by the U.S. Treasury Department.
"The 10-year note auction went tremendously well,'' said John Canvan, market analyst at Stone & McCarthy Research Associates in Princeton, New Jersey. "The auction stopped far below the 1 p.m. bid side, and the bid/cover was the best since last October. The buyside take-down figures were exceptional."
The benchmark 10-year Treasury note, down 9/32 immediately before the auction, had erased that loss and was nearly unchanged on the day in mid-afternoon trade. It yielded 2.02 percent, down from 2.05 percent at the bidding deadline, and unchanged from late Tuesday.
"Based on today's results, the 30-year Treasury bond auction is likely to go fairly smoothly,'' Lowery said. In when-issued trade, the 30-year bonds to be sold on Thursday yielded 3.22 percent.
The rise in February retail sales, the largest since September, followed Friday's report of robust jobs growth.
Analysts had been questioning whether the end of a temporary payroll tax cut and worries over the impact of automatic government spending cuts might cause consumers to cut back on spending.
Instead, the Commerce Department said that retail sales rose 1.1 percent last month, after a revised 0.2 percent gain in January. Economists polled by Reuters had expected retail sales to rise 0.5 percent.
"The positive momentum in spending is indicative of continued resiliency in consumer spending,'' said Millan Mulraine, fixed income strategist at TD Securities in New York.
The positive economic news hurt Treasurys, a traditional safe-haven investment, for the first part of the day.
Benchmark 10-year Treasury notes traded 7/32 lower in price with their yield at 2.04 percent, up from 2.02 percent late Tuesday, while 30-year bonds traded 12/32 lower to yield 3.24 percent from 3.22 percent on Tuesday.
Even those losses were restrained, however, with Treasurys prices underpinned by the Federal Reserve's latest economic stimulus program of buying $85 billion of mortgage-backed securities and U.S. government debt per month.
Some analysts say recent comments from Fed Chairman Ben Bernanke point to the U.S. central bank continuing its debt purchases through at least the end of 2013.
"With Bernanke reconfirming the Fed's commitment to (quantitative easing), we see the belly of the curve well supported and it is trading cheap," Nomura Securities said in a note to clients.
As part of its latest stimulus program, the Fed on Wednesday bought $1.464 billion of Treasurys maturing February 2036 through February 2043.