Prices for Treasurys fell Monday on selling by Wall Street dealers looking to lock in borrowing costs for corporate bonds they are underwriting ahead of this week's Federal Reserve policy meeting and employment report.
Bets the government might pare its sales of short-term debt also exerted pressure on bonds, although benchmark yields remained about 17 basis points below their 23-month high of 2.755 percent set this month, analysts said.
"There were some rate-locking activities," said Chuck Retzky, director of futures sales at Mizuho Securities USA in Chicago. "It started with the corporate issuance announcements."
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Companies are poised to sell $15 billion to $20 billion in investment-grade bonds this week, with most deals to be done before the Fed's policy announcement Wednesday and jobs data Friday, said IFR, a unit of Thomson Reuters.
As a part of underwriting, a dealer sells Treasurys as a hedge to lock in the borrowing cost on the bond issue before the deal is completed. Once the bond is sold, the dealer buys Treasurys to exit the "rate lock."
Typically, market moves stemming from supply hedging are temporary and not indicative of market sentiment. Investors are waiting to see whether the Fed is on track to reduce its bond-purchase stimulus later this year as the economy has shown signs of growth despite naggingly high unemployment.
Fed Chairman Ben Bernanke signaled in recent congressional testimony that the central bank might consider buying fewer bonds. The possibility of the Fed scaling back its third round of quantitative easing roiled financial markets worldwide, with Treasurys suffering their worst quarter in two and a half years.
Since then, Bernanke and many top officials have sought to calm jittery investors that any reduction in purchases in Treasurys and mortgage-backed securities, currently running at $85 billion a month, is not set in stone. Moreover, they said, the Fed probably will keep short-term rates near zero for a long time even after it stops buying bonds.
"The Fed meeting is the most important event this week," said Larry Milstein, head of government and agency trading at R.W. Pressprich in New York. "It has to do with expectations about some clarification from the Fed about tapering of bond purchases."
A number of Wall Street economists are forecasting that the Fed will begin to trim its bond purchases at the September policy meeting, the next one after this week's two-day meeting.
"To tip the scales to September, the Fed would need to see a pretty strong employment report this Friday," said Dan Heckman, senior fixed-income strategist at U.S. Bank Wealth Management in Kansas City, Mo.
Other economic releases traders will watch closely include the Conference Board's consumer confidence report and S&P/Case-Shiller home price data on Tuesday, ADP's private-sector employment report and the government's first estimate of second-quarter gross domestic product growth on Wednesday, and the Institute for Supply Management's manufacturing indexes on Thursday.
The price on benchmark 10-year Treasury notes fell 10/32, while the yield rose to 2.60 percent, up 2.3 basis points from late Friday.
In addition to the Fed and a heavy spate of data, the Treasury's quarterly refunding announcement Wednesday will be a focus for traders and investors.
Some analysts expect the Treasury to cut coupon-bearing debt sales for the first time since September 2010 as a falling deficit reduces funding needs. Any cuts are seen likely to start in the shortest maturities before moving to longer-dated debt.
Less short-term debt supply should support prices and keep a lid on borrowing costs for the federal government whose deficit, while on track to shrink this year, remains elevated from its level before the 2007-2009 recession, analysts said. In anticipation of relatively more longer-dated Treasurys than shorter-dated debt, some traders trimmed their longer-dated debt on Monday.
U.S. Treasury bond prices
"If there is any cut in the front end, it will help steepen the yield curve due to relatively more supply at the long end," R.W. Pressprich's Milstein said.
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The yield curve—the yield differential between short- and long-dated Treasurys—steepened, with the spread between two-and 10-year note yields growing to 2.27 percentage points, the widest in about two and a half weeks.
The Treasury Department will release its quarterly refunding details on Wednesday at 8:30 a.m.