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Bonds Hold Losses After Auction on 2-Year Notes

U.S. Treasury debt prices held steady at lower levels Wednesday, after average demand for a record $31 billion offering of two-year notes.

The 2-year note's price was down 3/32 after the auction. Its yield, which moves inversely to its price was 2.78 percent, flat compared with the level shortly before the auction results but higher than the 2.72 percent late Tuesday.

Treasurys initially fell, taking benchmark yields to their highest level in nearly a month, as falling oil prices helped push stocks higher and cut any flight-to-safety bid for bonds.

Treasury prices have fallen five out of the last six sessions as bank earnings have alleviated some concern about the health of the financial sector, while efforts by mortgage giants Freddie MacandFannie Maeto add capital have soothed some worries about the future of the government-sponsored enterprises.

A spate of new supply this week also weighed on the market.

The Treasury will sell $21 billion of 5-year notes on Thursday.

Lower oil prices have also helped to boost stocks and hurt bonds, with analysts thinking the weaker energy prices will help to bolster consumer spending and the struggling U.S. economy. Oil was down more than $1.75 barrel Wednesday near $127 per barrel.

"You have got equities showing a better footing again today, helped by lower oil prices and decent earnings news, so we continue to see some unwinding of safe-haven gains in Treasurys, and then of course we have supply weighing as well," said Kim Rupert, managing director of global fixed-income analysis at Action Economics in San Francisco.

Benchmark 10-year Treasury notes were trading 13/32 lower in price for yield of 4.16 percent -- the highest since June 25 -- from 4.10 percent late Tuesday.

"The big story is what is happening with equities -- even though it is not a spectacular rise it is enough to get things started, and there is also supply coming up," said Rudy Narvas, senior analyst at 4Cast Ltd in New York.

In addition to the new debt supply from the Treasury, expected new supply of bonds from the GSEs was also adding to the bearish take on bonds.

Congressional budget analysts on Tuesday put a $25 billion cost estimate on a Bush administration plan to bolster Fannie Mae and Freddie Mac.

"This adds to worry about the supply that exists already and is one reason why yields have moved up," said Tony Crescenzi, chief bond market strategist at Miller, Tabak & Co in New York.

A rescue package for the U.S. housing marketis scheduled to come to a vote in the House of Representatives Wednesday.

The White House on Wednesday said that President Bush would sign the bill into law, after having previously threatened to veto the bill. In the meantime, Freddie Mac and Fannie Mae shares were trading higher, up 9.5 percent and 12.5 percent respectively.

While oil prices have been falling in recent days, ongoing concerns about rising inflation have also pressured bonds, with several Federal Reserve policy-makers saying the central bank central bank may have to move sooner rather than later to tighten monetary policy to fight rising inflation, with the U.S. consumer price index rising 5.0 percent in the year to June.

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