Treasurys Close Lower in Wake of 10-Year Note Auction
December 09, 2004 4:21 PM

By Michael Mackenzie
Dow Jones Newswires

NEW YORK -- Treasury prices, led by long-dated maturities, settled lower Thursday, after the market reached the limits of its recent rally.

Helping seal a negative close for the market was a 10-year note reopening auction that was mainly absorbed by primary dealers.

The $9 billion 10-year note reopening arrived at a high rate of 4.15%, the level it was trading just before the 1 p.m. EST deadline. The bid-to-cover ratio was 2.68, versus 2.05 for the first sale of the issue in November and was above the 2.25 average for the past 10 sales.

As is usually the case with 10-year reopenings, the indirect bid -- a classification of buyer that includes foreign central banks and large institutional investors -- was low, arriving at under 10% for the sale.

"Dealers bought this auction with indirect bidding a very soft 9.8%, weak even by these off-cycle 10-year standards," said David Ader, interest-rate strategist at RBS Greenwich Capital in Greenwich, Conn.

Michael Kastner, head of taxable fixed income at Deutsche Private Bank in New York, said the auction wasn't a "real shock" because the demand is typically not there for a reopening. Still, "the amount taken at the high end indicates to me there was an awful lot of bidders who didn't want to buy the market."

Although the auction results pulled Treasury prices lower, "For a street-owned auction, the market is trading fairly well; we are off, but not off by a lot," said Mr. Ader.

At 3:45 p.m. EST, the 10-year Treasury note stood at 100 19/32, down 12/32 to yield 4.18%. The 30-year bond was down 30/32 at 107 28/32, yielding 4.84%.

The new five-year note stood at 99 24/32, yielding 3.55%, while the three-year note was off 3/32 to 99 19/32, yielding 3.14%. The two-year note was down 1/32 to 99 29/32 to yield 2.93%.

The pullback in Treasurys came after a hefty rally in prior sessions that drilled the 10-year yield down to 4.11% earlier Thursday from 4.25% at the start of this week.

"There is good resistance at 4.11%/4.10%," on the 10-year, said Rick Klingman, head of Treasury trading at ABN Amro in New York. He said yields are looking a little rich at current levels, but that technically the market remains in good shape.

Treasurys had rallied Wednesday, buoyed initially by the apparent unwinding of a popular trade that had favored European debt over U.S. government securities and given additional juice by a robust $15 billion auction in five-year notes.

Led by gains in long-dated maturities, the rally also prompted traders to cover short, or bearish, positions, further buoying prices. That also helped flatten the yield curve; but in afternoon trading Thursday, the market was lower and the curve steepening further.

"We got very overdone yesterday," said Paul Calvetti, global head of U.S. Treasurys trading at Barclays Capital in New York. He sees a yield range of 4.125% to 4.375% on 10-year notes until the end of the year.

In data released midsession, the Chicago Fed Midwest Manufacturing Index rose 1.8% in October from September to a seasonally adjusted level of 118.2. The Chicago Fed said all four sectors tracked by the index -- auto, steel, machinery and resources -- rose in October. It said the last time all four sectors increased was in March 2004.

Early Thursday, Treasurys displayed little reaction to higher-than-expected jobless claims. The number of U.S. workers filing first-time applications for unemployment benefits climbed to a 10-week high last week. Seasonally adjusted initial jobless claims rose by 8,000 to 357,000 in the week that ended Dec. 4, the Labor Department said. The four-week average rose to 341,250, the highest level since the week of Oct. 30. Economists surveyed by Dow Jones Newswires and CNBC had expected a decline of 14,000 claims.

The market also largely ignored data showing that U.S. wholesale inventories rose in October. Wholesale inventories climbed 1.1% to a seasonally adjusted $323.09 billion in October, the Commerce Department said. September inventories were revised to show a 0.6% increase after first being reported up 0.5%. The advance in October wholesale inventories was more than twice Wall Street analysts' expectations of a 0.5% gain.

Also Thursday, the Labor Department reported that overall import prices rose a meager 0.2% last month after a 1.6% increase in October. The slowdown mainly reflected petroleum prices, which fell 2.6%. Nonpetroleum prices rose 0.7%, the fastest rate since January. The rise in overall import prices matched Wall Street's expectations.

-By Michael Mackenzie, Dow Jones Newswires; 201 938 5451; michael.mackenzie@dowjones.com;
(Ramez Mikdashi in New York, Joseph Rebello and Campion Walsh in Washington contributed to this report.)

(END) Dow Jones Newswires

12-09-04 1621ET