Bonds Flat on Tepid Demand, Rate Cut Expectations

U.S. Treasury debt prices were flat Thursday, on mediocre demand in a five-year note auction and on weak economic data that supported the view the Federal Reserve will cut interest rates next week.

Stock losses, tied to disappointing earnings and anxiety over more financial companies suffering subprime-related losses, fostered flight-to-safety bids for low-risk U.S. government securities, analysts said.

"There remains a safety bid for Treasuries," said Kim Rupert, managing director of global fixed-income analysts with Action Economics in San Francisco.

This solid interest helped the Treasury Department's $13 billion auction of fresh five-year notes, said Rupert. Although indirect bids, which include buying by foreign central banks, were below recent averages, Thursday's auction still "came in at a pretty expensive level," she said.

Since the auction, five-year Treasury notes were unchanged in price for a 3.99 percent yield, flat from late Wednesday.

Benchmark 10-year debt was off 1/32, yielding 4.35 percent, while the 30-year bond was up 1/32 to yield 4.65 percent. Bond yields move inversely to prices.

Treasuries, while well supported, struggled to advance on the day even in the face of more bleak housing news.

While new U.S. single-family home sales rose in September, the annual rate was slower than expected and the August figure was revised downward, driving it below the original estimate.

"People are expecting continued bad news, so it looks like it did not get any worse; however, a single data point does not reverse a trend," said Brett Hawkins, portfolio manager, at Thompson, Siegel and Walmsley, in Richmond, Va.

"From our standpoint, we expect disappointing home sales for most of the next 18 months," he added. Durable goods orders and jobless claims reported earlier were also weak.

Meanwhile, the interest rate futures market has fully priced in a bond-friendly cut of 25 basis points in the target fed funds rate to 4.50 percent at the Federal Open Market Committee meeting next week.

Two-year notes, which are more sensitive to the market's Fed outlook than longer maturities, were unchanged in price to yield 3.74 percent, about a full percentage point below the current level of the fed funds rate.