Bonds Slip As US Economy Shrinks Less Than Forecast

U.S. Treasury debt prices fell Thursday as stocks rose after data showed the economy contracted less than expected in the third quarter, curbing the allure of safe-haven government debt.

A pending 5-year note auction also weighed on prices, analysts said.

U.S. stocks posted moderate gains in afternoon trade, reducing some of the safe-haven demand for government securities, analysts said.

"To a large extent what we have been seeing is a mirroring of the equity markets as the risk aversion trade drives a lot of the action," said John Canavan, market analyst at research company Stone & McCarthy in Princeton, N.J.

The benchmark 10-year Treasury note's price, which moves inversely to its yield, traded down 14/32 for a yield of 3.92 percent, versus 3.86 percent late Wednesday, within its ranges for the past three weeks.

Five-year notes and the benchmark 10-year note were underperforming other maturities. "A lot of the reason for that is positioning ahead of today's 5-year note auction," Canavan said.

The Treasury Department planned to sell $24 billion of 5-year notes in an auction that began at 1 p.m. EDT.

The 5-year note's price slipped 5/32 for a yield of 2.76 percent, versus 2.73 percent late Wednesday.

Short maturities also tend to respond closely to expectations on official interest rate moves.

Bond investors continued to mull the prospects for more Federal Reserve interest rate cuts and initiatives to pump unprecedented extra amounts of liquidity into the global banking system, following Wednesday's 50 basis points cut in the target rate.

With the key U.S. short-term lending rate now at 1 percent, matching a low in 2004, the Fed now has less potential to ease policy. Bond yields have already fallen a long way and may not have room to go much lower, analysts said.

U.S. short term interest futures showed that market participants see a roughly 74 percent implied chance that the Federal Reserve will trim interest rates by 25 basis points at its December policy-setting meeting.

The 2-year Treasury note's price was down 1/32 for a yield of 1.56 percent, versus 1.55 percent late Wednesday.

Earlier, Treasury prices slipped after a report showed U.S. gross domestic product shrank 0.3 percent in the third quarter, less than economists' median forecast of a 0.5 percent contraction.

Economists said details within the report suggested a poor economic performance going forward.

"Consumer spending is about 70 percent of the GDP and this looks like the lowest it has been in two decades, which goes to show that in the fourth quarter we are going into the recession," said Bill Walsh, president of Hennion & Walsh in Parsippany, N.J.

The 30-year Treasury bond was down 4/32 in price for a yield of 4.25 percent, versus 4.24 percent late Wednesday.

Trade in the 30-year Treasury bond is being heavily driven by technical factors, including the recent swings of the 30-year interest rate swap spread above and below the 30-year bond yield, said Eric Liverance, head of interest rate derivatives strategy with UBS in Stamford, Conn.

"Fundamentals have gone out of the window for the time being," he said.

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