U.S. Treasurys fell Wednesday as a big stock market rally drew money out of its recent safe-haven in government bonds.
Against the backdrop of a major stock rally, bonds slightly extended those losses when the Treasury's auction of two-year notes drew a disinterested response.
"The auction was ugly," said John Canavan, analyst at Stone and McCarthy Research Associates in Princeton, N.J. "The strong correction in both equities and Treasurys over the past two days caused bidders to shy away."
The bid-to-cover ratio, a gauge of demand for the new two-year Treasury notes, was 2.21, below recent averages.
Indirect bidders, who include foreign central banks, took a below-average 23 percent of the sale.
The lure of a rallying stock market offset data showing a slide in business investment and comments from Federal Reserve Vice Chairman Donald Kohn that supported bets on interest rate cuts, both of which normally would be considered bullish for bonds.
The Federal Reserve Beige Book, a narrative account of business conditions around the nation, offered a somewhat downbeat view of the economy, but could not lift Treasury prices in the face of a powerful stock market rally.
Treasurys briefly pared losses after a report of weak data on existing home sales early in the session, but resumed their slide as stocks advanced.
"Stocks are up rather handily and corporate issuance seems to have returned," noted David Ader, head of government bond strategy with RBS Greenwich Capital in Greenwich, Conn.
Fed Vice Chairman Kohn said uncertainties about the economic outlook were "unusually high" and cited the need for monetary policy flexibility. This lent some brief support to bonds after early losses.
"Kohn's comments made a difference to stocks," said Josh Stiles, senior bond strategist at IDEAglobal.
"A lot of the talk from Fed officials had been on the hawkish side so there was a dramatic disconnect between Fed talk and market pricing," Stiles said. "But Kohn seemed to allow for the possibility that the Fed could cut rates."
Equities Zoom on Fed Talk
But stocks appeared to benefit more than bonds from the notion that the Fed would stimulate the economy through easier monetary policy.
The stock market's advance sent the Nasdaq up more than 3 percent, the Dow Jones industrial average up 321.42 points, or 2.48 percent, and the Standard & Poor's 500 Index up 37.16 points, or 2.6 percent.
Recent rallies have also left Treasurys prices high and yields low, weakening their appeal to investors.
In mid-afternoon trade, benchmark 10-year notes were down 20/32 in price on the day, lifting the yield to 4.03 percent from 3.95 percent late Tuesday.
The latest grim news from the housing sector came in figures on existing home sales, which fell in October to a record-low pace, showing that the troubled sector's slump was deepening.
New orders for U.S. durable goods dropped for a third straight month during October and companies seemed wary about making new investments, a Commerce Department report showed.
Still, bonds remained focused on the fortunes of stocks and narrowing swap spreads reflected improved credit sentiment.
The new two-year note yields trading on a when-issued basis yielded 3.1775 percent, compared with 3.09 percent late Tuesday. Bond yields and prices move inversely.
Five-year notes slid 14/32 to yield 3.48 percent, while 30-year long bonds slumped 21/32 to yield 4.41 percent.