US Bond Prices Gain as Yields Entice Investors

U.S. Treasury debt prices rose on Tuesday as a recent spike in yields lured investors and as U.S. government debt tracked other safe-haven markets higher in the absence of key domestic data releases.

Benchmark 10-year Treasury notes on Tuesday were last trading 11/32 higher in price to yield 2.025 percent, down from 2.06 percent late Monday, while 30-year bonds were trading 26/32 higher in price to yield 3.22 percent, down from 3.26 percent

Bond prices rose along with those of German Bunds and British gilts, which benefited from data showing a surprise fall in British industrial output in January.

The Treasury Department auctioned off $32 billion of three-year notes at a high yield of 0.411 percent Tuesday. The bid-to-cover ratio, an indicator of demand, was 3.51, compared to a recent 10-auction average of 3.61.

Ahead of Tuesday's debt auction, three-year notes in the when-issued market, considered a proxy for where the notes will price at auction, were yielding near 0.41 percent, compared with a yield of about 0.40 percent on the open market.

On Wednesday, $21 billion of reopened 10-year notes will be auctioned and $13 billion of reopened 30-year bonds will be sold on Thursday.

Ten-year Treasury yields had pushed to their highest levels since April at 2.09 percent after better-than-expected U.S. jobs data on Friday, and borrowing costs have struggled to break past that level since.

"After the big moves in the market, we expect supply to be a good opportunity for consolidation and investors to re-enter the market due to the liquidity,'' said George Goncalves, head of U.S. rates strategy at Nomura Securities in New York.

While the labor market was showing signs of improvement, the Federal Reserve was unlikely to be put off its ultra-loose monetary policy under which it is buying $85 billion per month of mortgage-backed securities and Treasurys and holding interest rates near zero, Goncalves said.

"We believe the Fed is still committed to easing and the nonfarm payrolls print did not change their stance. Thus the recent uptick in yield due to the sell-off could provide good buying opportunities," he said.

In addition to this week's debt sales, investors are looking ahead to February retail sales on Wednesday for any fresh evidence the U.S. economic recovery may be gaining traction.

Some investors expect price moves in Treasurys to be fairly muted, however, heading into the Federal Open Market Committee's next policy meeting March 19-20.

"We expect rallies in bonds to be short-lived in the absence of a meaningful correction in equities and today's uneventful three-year auction will shift attention to the more important 10-year and 30-year auctions in coming days," said Richard Gilhooly, fixed income strategist at TD Securities in New York. "The next significant shift in yields is likely to come after the FOMC meeting next week as the market waits to see whether the Fed is impressed with recent developments."

The Fed on Tuesday bought $1.38 billion of Treasury inflation-protected securities maturing April 2028 through February 2043 as part of its latest stimulus program.