U.S. government debt prices fell Wednesday as investors sold Treasurys to make room for $17 billion of new 10-year debt and unwound mortgage-related hedges after Freddie Mac unveiled steps to boost capital.
Investors often buy and sell Treasurys and interest rate swaps to hedge against changing values on mortgage bonds.
"The bond market faces pressure from the 10-year auction and mortgage hedging," said Larry Dyer, an interest rate strategist at HSBC Securities in New York.
Freddie Mac, the No. 2 U.S. mortgage finance company, plans to keep its mortgage portfolio "roughly flat" until market conditions improve, said the company's chief financial officer, Buddy Piszel.
Concerns about the lack of buying support from Freddie Mac led traders to unload mortgage-backed securities and related Treasury hedges, analysts said.
These bond sales overwhelmed a brief flurry of safe-haven bids seen immediately after Freddie posted a fourth straight quarterly loss, they said.
Traders were selling longer-dated Treasurys ahead of the 10-year note auction, part of the Treasury Department's August refunding later Wednesday, analysts said.
"We are not seeing a lot of interest in the long-end," said Michael Franzese, head of government trading at Standard Chartered in New York.
Benchmark 10-year Treasurys were down 11/32 in price at 98-15/32. Their yield, which moves inversely to the price, was 4.07 percent, up from 4.02 percent late Tuesday.
Short-end Performs Better
Short-dated Treasurys fared better than longer maturities, as worries over protracted malaise in the financial sector will likely prevent the Federal Reserve from raising interest rates, analysts said.
Two-year notes were down 2/32 in price to yield 2.60 percent, up from 2.56 percent late Tuesday.
Freddie's $821 million quarterly loss and its plan to conserve capital in anticipation of further loan losses sapped the euphoria for stocks, which rallied Tuesday after the Fed left key U.S. interest rates steady and hinted at no immediate policy tightening in the near term.
Worries about a global growth slowdown were reinforced in the wake of weaker economic readings in Asia and the euro zone.
UBS downgraded its forecast on U.S. growth in the fourth quarter. It said Wednesday it sees a 0.5 percent contraction in real GDP in the last quarter of 2008, compared with an earlier estimate of a 1.0 percent growth.
The anxiety about a recession and the financial sector was offset by another decline in oil prices. Plummeting energy costs have assuaged some inflation concerns, boosting the stock market in recent days.
In other cash trading, five-year notes were down 8/32 in price for a 3.36 percent yield, up from 3.30 percent late Tuesday, while 30-year bonds were down 24/32 to yield 4.69 percent, up from 4.64 percent late Tuesday.
The Treasury will sell $10 billion of 30-year bonds on Thursday.