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Bond Prices Rise After Strong Debt Auction

Traders work in the S&P 500 options pit at the Chicago Board Options Exchange
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Traders work in the S&P 500 options pit at the Chicago Board Options Exchange

U.S. Treasury prices gained on Thursday as bond markets showed signs of stabilizing following the 7-year auction, which drew more aggressive bidding than markets had expected.

The Treasury auctioned $29 billion in 7-year notes at a high yield of 1.932 percent, the highest yield since 2011. The bid-to-cover ratio, an indicator of demand, was 2.61.

"The market remains reasonably well bid following the successful takedown of the 7-year auction. From here, the market focuses on month-end considerations and setting up for next week's employment report," said Ian Lyngen, senior Treasury strategist at CRT Capital.

The 7-year auction was the final leg of $99 billion in new coupon-bearing supply this week. Five- and seven-year notes are the most sensitive to Fed interest-rate policy and have been the weakest performers in the recent selloff. The $35 billion five-year note sale saw the lowest demand since September 2009, with a bid-to-cover ratio of 2.45 times.

However, the bidding through the indirect channel was far less than those of the previous auctions this week, which indicates that investors felt more confident now that the other auctions were cleared, wrote Nomura Securities analysts in a note.

"In addition, after weeks of higher rates and high market volatility, the recent small rally and market consolidation is starting to bring out value investors before quarter end. Overall, this is still a decent auction," said Nomura analysts.

The benchmark 10-year bond was last up 17/32 in price to yield 2.48 percent, after earlier trading as low as 2.47 percent and as high as 2.55 percent after hitting a 22-month high of 2.67 percent on Monday. Still, current levels are significantly higher than the 2.20 percent they were trading at before Bernanke's comments and the 1.60 percent at the begging of May.

Earlier, the bond market digested comments from several Federal Reserve officials and a mixed pair of economic reports.

Today's Fed speakers largely delivered the same message: The date to start tapering bond buying is not set and Fed will continue watching economic data.

"The comments from monetary officials have generally been supportive today, and this week in general," Lyngen said.

Fed Board Governor Jerome Powell said financial markets have overreacted to the Fed's statements on reducing the pace of bond purchases later this year, and have brought expectations of the first Fed rate hike too far forward.

"Market adjustments since May have been larger than would be justified by any reasonable reassessment of the path of policy," he said in a speech at the Bipartisan Policy Center, a Washington think-tank.

New York Fed President William Dudley stressed that the newly adopted timeline for reducing the pace of bond buying depends not on calendar dates but on the economic outlook, which remains quite unclear.

Dudley, closely associated with Fed Chairman Ben Bernanke, said that recent market expectations for an earlier rate rise are "quite out of sync" with the statements and expectations of the policy-making Federal Open Market Committee.

"Economic circumstances could diverge significantly from the FOMC's expectations," Dudley said according to prepared remarks.

(Read More: Markets Have It Wrong on Fed's QE Policy: Dudley)

On the economic front, jobless claims came in slightly weaker than expected, while pending-home sales blew past forecasts.

Pending-home sales for May rose 6.7 percent, the National Association of Realtors reported, far above economists' estimates of a 1-percent gain.

Treasurys have held a firmer tone this week after being roiled last week when Bernanke said the U.S. central bank is likely to pare back its bond purchase program later this year if the economy continues to improve.

Downward revisions to first-quarter gross domestic product data on Wednesday led some investors to speculate that a pullback of stimulus may still be far away.

—By CNBC with Reuters

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