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Treasurys Higher as Economy Dampens Risk

Published: Wednesday, 28 Oct 2009 | 2:46 PM ET

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By: Reuters

U.S. Treasury debt prices rose Wednesday after news of a surprise drop in new home sales raised worries over the economic recovery and cooled speculation the Federal Reserve would move away from its easy monetary policy soon.

Weakness in the U.S. stock market in the wake of the homes sales data also fueled a safe-haven bid for bonds.

Price gains were limited however after an auction of $41 billion of five-year notes failed to attract the strong buying interest seen in the sale of two-year Treasury notes Tuesday.

"The new home sales were a bit of a disappointment, and there was also the general weakness in stocks," said William O'Donnell, head Treasury strategist with RBS Securities in Stamford, Connecticut, adding "Treasurys are getting the benefit as people rethink risky trades."

Bond Yields

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Benchmark 10-year Treasury notes were trading 10/32 higher in price with their yield, which moves inversely to price, at 3.41 percent, down from 3.45 percent late Tuesday.

The government reported Wednesday that new home sales slowed to an annualized rate of 402,000 units in September from a downwardly revised 417,000 units in August. Analysts had predicted the September sales rate to come in at 440,000 annualized units.

The home sales drop came after an earlier report that showed a 1.0 percent rise in durable goods orders last month 1.0 percent rise in durable goods orders last month, which was in line with analysts' expectations.

Short-term U.S. interest rate futures rose after the weak home sales data, implying traders reduced bets the Fed, the U.S. central bank, will raise benchmark interest rates in the second quarter of 2010.

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Treasuries pared gains Wednesday afternoon following the five-year note auction, which is part of this week's record $123 billion of debt supply.

While not exactly a failure, the five-year note auction was not greeted with the strong demand seen in the first two legs of this week's auctions—$7 billion in five-year inflation-protected securities Monday and $44 billion in two-year notes Tuesday.

"It was a good auction but it wasn't as great as yesterday's two-year note auction," said Mary Ann Hurley, vice president of fixed-income trading at D.A. Davidson & Co in Seattle.

The Fed will auction $31 billion of seven-year notes Thursday.

Ahead of that however, five-year Treasury notes were trading 7/32 higher in price to yield 2.33 percent, down from 2.37 percent late Tuesday, while the 30-year bond was 14/32 higher to yield 4.25 percent from 4.28 percent.