Prices of government bonds fell today ahead of another round of Treasury auctions as traders worried that the latest issues might be met with weak demand.
The government is auctioning off more than $200 billion of debt this week, including $115 billion in two, five and seven-year notes.
"The safest thing is to stay on the sidelines until some of these things are priced," said Mike Wallace, global market strategist at Action Economics.
On Monday, the Treasury auctioned off $32 billion of three-month bills and $31 billion of six-month bills to decent demand, however bill auctions occur weekly and aren't as closely watched as auctions of longer-term Treasurys.
Investors have been keenly focused on long-term Treasury auctions this year, wary of any sign that demand, especially from foreign governments, might be waning. The U.S. government is relying on successful auctions to help fund its stimulus programs, but with the debt load expected to reach $1.84 trillion this year, some investors are concerned that demand will fall off.
If that were to happen, the government would be forced to raise the returns on bonds to attract investors. That in turn could hike up interest rates on mortgages and other types of loans that are closely tied to long-term Treasury yields, potentially choking off a recovery.
Auctions have been going fairly smoothly so far this year, but even one auction doing poorly could put pressure on the market, analysts say.
The auctions this week come as Chinese officials begin two days of high-level talks with the Obama administration in Washington. China is the largest foreign holder of U.S. Treasury debt and officials want to be assured that those holdings are safe and won't be jeopardized by inflation. Rising prices are bad for Treasurys because they eat into their fixed returns over time.
Wallace said investors will be keeping a close watch on the discussions for any signs of strain between the two countries. "Any comments that are shot from the hip could affect Treasurys or the auction process," he said.
In early afternoon trading, the benchmark 10-year Treasury note fell 12/32 to 95 7/32. Its yield rose to 3.71 percent from 3.66 percent late Friday.
The 30-year bond fell 1 point to 94 7/32, and its yield jumped to 4.61 percent from 4.54 percent.
The two-year note slipped 2/32 to 100 5/32, while its yield rose to 1.04 from 1.01 percent.
The yield on the three-month T-bill was unchanged at 0.18 percent.
A government report showing sales of new homes in June rose by the largest amount in nearly nine years didn't help the case for Treasurys Monday. However, that report also showed that home prices fell sharply from a year ago, which weighed on stocks. Major indexes drifted lower in early afternoon trading, falling less than 0.5 percent.
The cost of borrowing between banks was little changed. The British Bankers' Association said the rate on three-month loans in dollars — the London Interbank Offered Rate, or Libor — was essentially flat at 0.50 percent.
Treasurys seesawed last week, rising at first after
Federal Reserve Chairman Ben Bernanke knocked down fears of impending inflation, then coming under pressure later as stocks soared on upbeat earnings reports and signs of stabilization in the housing market.
