Treasurys Rise After Lackluster 30-Year Auction

Even Muni Bonds May Be Targeted in 'Fiscal Cliff' Talks

U.S. Treasurys prices rose on Thursday as a three-day rise in yields lured investors to buy government debt both on the open market and at a $13 billion auction of 30-year bonds, the final part of this week's $66 billion in longer-dated supply.

Thursday's 30-year bond sale fetched lukewarm demand, and the data of all three auctions this week suggested that an anticipated surge in U.S. bond demand from Japanese banks, insurers and pension funds has yet to materialize.

The lackluster auction briefly shaved the bond market's gains in the afternoon before another bout of bargain-hunting emerged, but buying was limited by a high-flying stock market, with the Dow Jones industrial average and the Standard & Poor's 500 reaching all-time highs.

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The bond market clung to earlier gains after a sell-off earlier in the week drove longer-dated U.S. yields from their lows of the year back to levels prior to last Friday's disappointing U.S. government payroll report.

The U.S. bond market rallied last week after the Bank of Japan announced a bold $1.4 trillion asset purchase program aimed at stimulating the country's sluggish economy. The news sent Japanese government debt yields to record lows and fed bets that Japanese investors would scramble for Treasurys and other higher-yielding foreign bonds.

This week's auction results "didn't suggest much of a pickup in that bid," said John Canavan, market strategist at Stone & McCarthy Research Associates in Princeton, New Jersey.

Benchmark 10-year notes last traded 3/32 higher to yield 1.795 percent, down 1.0 basis point from late on Wednesday.

The 30-year bond last traded 2/32 higher to yield 3.001 percent, down 0.4 basis point from Wednesday.

The spread between 30-year and five-year yields held steady on the day at 2.27 percentage points. It was tighter than 2.29 points a week ago after the BoJ announced its stimulus plan.

Waiting for Japanese Bids

At Thursday's 30-year bond sale, indirect bidders that include foreign central banks accounted for 31.44 percent of the overall purchases of the second reopening of the bond issue, which was the lowest in six months.

Indirect bids at Tuesday's three-year debt auction and Wednesday's 10-year note sale were below average.

"We saw very little evidence of huge foreign buying at this auction, and our analysis suggests it will occur over time rather than be extremely front-loaded," Aaron Kohli, interest rate strategist at BNP Paribas, wrote in a note.

Treasurys prices earlier were little changed after data showed the number of Americans filing new claims for unemployment benefits fell more than expected last week.

Although Analysts said seasonal factors such as Easter played a role, the figures could soothe some fears that the labor market recovery could be stumbling after weaker-than-expected payrolls figures. The March payrolls figures had pushed up Treasurys prices.

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Looking ahead, Treasury yields might resume their climb if Friday's government report on retail sales comes in stronger than expected and leads analysts to upgrade their forecasts on first-quarter U.S. economic growth.

The median forecast among economists polled by Reuters was for retail sales to show no change in March after a 1.1 percent jump in February. Consumer spending accounts for roughly two-thirds of the U.S. economy.

In the wake of the weak March jobs report and other recent disappointing economic data, some analysts and fund managers still expect U.S. yields to rise later this year as the economy continues to improve and the Federal Reserve will likely signal a slowing of its bond purchases by year-end.

Michael Materasso, co-chair of the fixed income policy committee at Franklin Templeton in New York, which has more than $800 billion in assets, said the 10-year Treasury yield should climb back above 2 percent. He said U.S. government debt is still less appealing than higher-yielding investment-grade corporate debt and mortgage-backed securities.

US Treasury Yields

US 10-YR
US 30-YR