Treasurys Rally On European Bank Concerns

First Published Tuesday, 7 September 2010 08:53 pm - © 2010 Dow Jones
By Nick Godt

Treasurys rallied Tuesday, sending yields lower, as investors sought safe havens amid fresh concerns about European banks and economic growth.
A fairly well-received government auction of $33 billion in three-year notes, which were sold at a record low yield of 0.79% also supported bond prices, pressuring yields. The Treasury will hold two more auctions this week.

Yields on benchmark 10-year Treasurys (UST10Y) fell 10 basis points to 2.60%. Yields on 2-year notes (UST2YR) dropped 3 basis points to 0.49%, while yields on 30-year bonds (UST30Y) were down 10 basis points to 3.67%.

Bond yields and prices move in opposite directions. A basis point is the equivalent of one one-hundredth of a percent.

As traders returned from a long holiday weekend, there was no U.S. economic data on Tuesday and attention turned overseas.

In Europe, banking stocks came under pressure as regulators met in Basel to finalize new global rules on capital requirements and after The Wall Street Journal reported that the region's recent stress tests underestimated some lenders' holdings of government debt.

Adding to concerns about economic growth, Germany's manufacturing orders dropped 2.2% in July from the previous month, the economics ministry reported Tuesday. Economists expected a month-on-month rise of 0.5%, according to Action Economics.

On Friday, Treasury prices fell on news that the U.S. economy lost fewer jobs than expected in August. But losses were tempered after another report showed slowing in the U.S. services sector.

Treasury to auction 3-year note

The Treasury Department sold $33 billion in 3-year notes (UST3YR) Tuesday at a yield of 0.79%, a record low for an auction.

Bidders offered to buy 3.21 times the amount of debt sold, compared to an average of 3.10 times for the past 12 months. Indirect bidders, a group that includes foreign central banks, bought 42.4%, versus 40% over the past two months.

"Committing money for 3 years at 0.79% certainly says something," said Peter Boockvar, strategist at Miller Tabak.

The market's interest in the short-term maturity, he said, follows the signals from the Federal Reserve, which "has made it clear they are stuck at zero for a long, long time and also is a test of risk aversion where a short maturity is an easy place to park money in an uncertain world."
On Wednesday, the Treasury is due to sell $21 billion in 10-year notes followed by $13 billion in 30-year bonds on Thursday.

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