Treasuries lower ahead of long bond’s return

US Treasuries fell on Wednesday in spite of a solid sale of 10-year paper, as traders awaited Thursday afternoon’s return of the long bond after more than four years’ absence.

The $13bn 10-year sale attracted bids worth 2.32 times the paper on offer, roughly equal to last year’s average, and a robust 40.8 per cent indirect bid.

“The 10-year went over well and yet the market still sold off. What’s really driving the market right now is that we’ve still got the 30-year auction to go,” said George Goncalves of Bank of America.

The market was also rattled by reports that Alan Greenspan, former Fed chairman, had told a private gathering the central bank might raise rates further than some observers expect.

By late afternoon in New York, the yield on 10-year notes was up 2.2 basis points at 4.595 per cent. The new 30-year bonds were changing hands at a yield of about 4.55 per cent in pre-sale “when issued” trade.

Eurozone government bonds found early support from weak German export data and shaky equity markets but later followed Treasuries down. In late trading, the yield on the two-year Schatz was up 7.4bp to 2.934 per cent and the 10-year Bund yield edged up 0.8bp to 3.499 per cent.

But gilts held onto gains in spite of a mixed report on UK manufacturing. Otherwise, investors were awaiting Thursday’s interest rate decision from the Bank of England, which is widely expected to hold rates at 4.5 per cent.

“The Bank of England should announce steady rates with only the very outside possibility of a cut [on Thursday],” said David Brown of Bear Stearns.

“The odds tend to favour the cut coming through next month at the March Monetary Policy Committee meeting,” he added. “With UK inflation running back down to target at 2.0 per cent and with economic soft spots ... the MPC needs to maintain a more accommodative monetary bias ahead.”

The yield on the two-year gilt was down 2.1bp to 4.286 per cent while the 10-year gilt yield lost 0.4bp to 4.214 per cent.

The yield on the benchmark 10-year Japanese government bondfell 0.5bp to 1.565 per cent as traders responded to a fall in Japanese share prices.
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