Treasury debt prices extended gains Wednesday on a well-bid Treasury two-year note auction.
The Treasury sold $28.0 billion in two-year notes in its monthly two-year note auction.
"The auction results were great," said Andrew Brenner, senior vice president at MF Global Inc in New York. "They cheapened up the two-year. The market came well through the 1.78 percent yield level at which it was trading before the auction."
The bid-to cover ratio was 2.44, compared to an average 2.86 bid-to-cover ratio for the twelve two-year auctions of 2007. Indirect bidders took about 26 percent of the issue, compared with an average of 31 percent in the 2007 auctions.
The high yield in the auction was 1.761 percent.
In when-issued trading after the auction, two-year notes yielded 1.727 percent.
Benchmark 10-year Treasury note prices which move inversely to yields, were up 4/32, its yield easing to 3.49 percent from 3.50 percent before the auction.
Treasury debt prices had risen earlier as weak economic data and higher oil prices dragged stock prices lower and created a small safety bid for Treasurys.
News that orders for durable goods, a key gauge of companies' appetite for investment, fell in February also fed concerns about the potential effects of the ongoing credit crisis on the economy.
"It's very clear that this credit crisis is now washing into the business sector," said William Sullivan, chief economist at JVB Financial Group. "We've seen weakness in housing and consumer spending and now it appears as if corporate investment spending is weakening as well."
Treasurys prices then trimmed gains after new home sales in Februaryproved to be higher than expected, however. While sales of new single-family U.S. homes fell 1.8 percent in February, sales occurred at an annual rate of 590,000 units, above forecast, and January sales figures were revised upward.
The inventory of unsold homes fell 2.1 percent.
"The existing and new homes sales data make it clear that inventories of unsold homes are being etched away," said Tony Crescenzi, chief bond market strategist at Miller, Tabak & Co. in New York.
"This idea of bottoming or stabilization (in the housing market) will gain traction and, ultimately, that will carry major implications for home prices and the entire financial system," he said.
Orders Drop Shows Economic Weakness
The weak data on durable goods orders fell into the camp of reports this week that showed lower home prices in January and a continued slide in consumer confidence in March. An exception was a rise in existing home sales in February, reported on Monday.
The durable goods report was "consistent with the economy operating on the edge of a recession if not being actually in one," said Scott Brown, chief economist with Raymond James and Associates in St. Petersburg, Fla.
Treasury investors must now deal with supply, as the Treasury will auction $28 billion of two-year notes on Wednesday and $18 billion in five-year notes on Thursday.
Even with the gains on Tuesday and narrow gains on Wednesday, the bond market has reversed only a few of Monday's steep losses, incurred as more positive sentiment on the credit crisis diminished the safe-haven bid for Treasurys and allowed stocks to soar.
Bond prices often trade inversely to stocks as investors shift cash between equities and debt, depending on the level of risk they are willing to accept on any given day.
"The bond market is watching the stock market closely," Brown said.