Treasury Holds 'Awful' Auction: 10-Year Yield Hits 3.95%

U.S. Treasury prices fell Wednesday, sending benchmark yields up to 4.0 percent for the first time in eight months, after an auction of 10-year notes heightened concerns over the burgeoning U.S. budget deficit.

It was the first test of the government's long-term borrowing ability since investors began to wonder last month whether the United States' prized AAA credit rating may be living on borrowed time.

Overall demand and a key proxy for foreign interest were both robust, especially for the reopening of a previously issued security, but the high yield at the auction was above market expectations.

This "tail," as it is known in the market, showed investors wanted the government to pay a premium in higher yields to get them to buy the bonds and tipped the balance for a negative interpretation of the sale.

"I thought the auction was sloppy," said Mary Ann Hurley, vice president of fixed-income trading at D.A. Davidson & Co in Seattle. "At this point the path of least resistance is down."

The existing 10-year Treasury notes were down as much as a point in price immediately after the auction and during the afternoon. However they last traded down 21/32, yielding 3.95 percent versus 3.87 percent at Tuesday's close. Before the auction it was down 19/32, yielding 3.94 percent.

The 30-year long bond was down more than two points in the immediate wake of the auction but later trimmed those losses a bit. It was last down 1-18/32, yielding 4.77 percent versus 4.66 percent at Tuesday's close.

Two Down, One to Go

The $19 billion 10-year auction was the second installment of a total of $65 billion worth of coupon securities set to come to market this week. Long bonds will have their turn in the spotlight on Thursday, when the government auctions $11 billion in 30-year debt.

If there was a bright point during the session that may bode well for the long bond sale it was perhaps that Treasurys managed to keep their losses contained. Dealers said yields had risen high enough to attract long-term, or so-called "real money" investors, particularly in longer-dated issues on the maturity spectrum.

"There is some real money buying at the back end of the curve," said Rick Klingman, managing director of Treasury trading at BNP Paribas in New York. "Guys are putting money to work, I guess. They saw four percent hold and they're coming in."

Bonds derived little benefit from a Federal Reserve report showing U.S. economic conditions were weak or got worse through May, though safe-haven government debt would normally firm on such news.

Two-year notes were down 3/32, pushing yields up to 1.37 percent from 1.31 percent on Tuesday.

The more bonds lose ground, the more investors are likely to wonder whether the Federal Reserve will increase its current $300 billion program of buying Treasurys, which it launched in March to keep credit conditions loose throughout the recession-bound economy.

As part of that campaign, the Fed bought $3.5 billion of Treasurys maturing from 2019 to 2026 on Wednesday and also announced its next rounds of purchases.

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