Bond Yields Whipsawed as Investors Flock to Apple Offering

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

U.S. Treasurys erased early gains on Tuesday in the face of a giant debt sale by Apple, leaving Treasuries prices little changed on the day.

Earlier, the yield on the benchmark U.S. 10-year note dipped to its lowest level since mid-December on a weaker-than-expected manufacturing snapshot from the Chicago purchasing managers index, along with expectations for more monetary accommodation from the Federal Reserve and the European Central Bank.

"Month-end demand, declining euro zone inflation figures, a record euro zone unemployment rate and a test of last Tuesday's best levels all played a role in boosting Treasuries overnight and in the morning," said John Canavan, fixed-income analyst at Stone & McCarthy Research Associates in Princeton, New Jersey.

"Expectations that the ECB will have to take some kind of action this week are also growing due to the weak data out of Europe and the falling pace of inflation," he said, referring to the European Central Bank's policy meeting on Thursday.

A fall in euro zone inflation to a three-year low of 1.2 percent in April and a rise in the unemployment rate to 12.1 percent in March has led investors to conclude the European Central Bank will cut the main euro zone interest rate at its monthly meeting by 25 basis points on Thursday to 0.50 percent as the bloc's economy weakens further.

Treasurys gave up gains before midday, however, as investors made room Apple Inc's six-part debt sale. Apple has attracted more than $50 billion in orders for a six-part debt sale expected to price later Tuesday, according to two market sources.

The technology company is issuing three-year and five-year fixed and floating-rate notes, as well as 10-year and 30-year fixed-rate notes via Deutsche Bank and Goldman Sachs.

In late afternoon trade, the price on the benchmark 10-year Treasury note was modestly higher, with its yield at 1.67 percent. The yield has dropped from as high as 2.05 percent on March 8. Meanwhile, the 30-year bond also rose marginally, yielding 2.88 percent.

Apple is expected to issue at least $15 billion in debt. Still, participants said Treasury yields were likely to stay low and that the yield curve would tend to flatten, narrowing the difference between short- and long-term yields.

"Greater economic weakness out of Europe with higher levels of unemployment and ebbing inflation - that theme is starting to gain greater momentum," said Wilmer Stith, co-portfolio manager of the Wilmington Broad Market Bond Fund in Baltimore, Md.

"The U.S. economy continues to slightly disappoint and in Europe the question is whether the ECB is going to lower its overnight rate or not. With the global quantititative easing machine, this all suggests the yield curve will be flatter," Stith said.

Treasurys prices reached session highs at mid-morning after after a measure of Midwest manufacturing activity reflected contraction, contrary to expectations for expansion. The Chicago Purchasing Management index read 49.0 in April, below the consensus forecast of 52.5.

Of particular interest to the market before Friday's key U.S. employment report was a drop in the Chicago Purchasing Management employment index to 48.7 in April from 55.1 in March. Readings below 50 point to contraction; readings above 50 point to expansion.

"The most concerning aspect was the drop in the employment component," Stith said. "That certainly was not an encourging sign for this Friday's payrolls report."

The government will release April U.S. employment data on Friday with non-farm payroll growth expected to total 145,000 jobs, according to economists polled by Reuters.

The Federal Reserve's policy-making committee began a two-day meeting that will end Wednesday with a statement that some believe could sound relatively dovish in response to recent, weaker economic data.

"Treasury prices are higher because it's looking more and more likely that the European Central Bank will indeed cut its main refinancing rate on Thursday while the Federal Reserve will stand pat on Wednesday," said Brian J. Jacobsen, chief portfolio strategist at Wells Fargo Funds Management in Menomonee Falls, Wisconsin.

"That makes Treasurys relatively more attractive than euro-denominated debt."

Bonds also briefly trimmed gains after the S&P/Case-Shiller composite index showed U.S. single-family home prices posted their best annual rise since May 2006, climbing 1.2 percent on a seasonally adjusted basis compared to January and topping forecasts for a 0.9 percent rise.

The Treasury sold $30 billion in four-week Treasuries bills on Tuesday, $10 billion less than the last week. This came on top of $9 billion in cuts in this week's three-month, six-month and 12-month bill auctions, which were announced last week.

The declining bill issuance has helped short-dated bill yields drop and some think declining supply could also extend to extra demand for coupon debt. The Fed bought $5.13 billion in notes April 30, 2017 and December 31, 2017 on Tuesday.