NEW YORK: US Treasury debt prices fell on Wednesday as investors reduced their bond exposure ahead of a $35 billion auction of new five-year supply and also to hedge against any surprises from the Federal Reserve's latest policy statement.
Benchmark yields rose to 2 percent, matching the level seen prior to the Fed's March 13 policy meeting. Bond prices tumbled after the US central bank modestly upgraded its outlook on the US economy and offered no hint it would soon embark on another round of quantitative easing, dubbed QE3, to stimulate growth. In a week, the 10-year yield jumped to 2.40 percent, a near five-month high.
"You don't have a lot of people who want to load up on Treasuries in front of the Fed," said Thomas Roth, executive director in US government bond trader at Mitsubishi UFJ Securities USA in New York. "Look what happened last month."
Preparation for this week's $99 billion coupon-bearing Treasuries supply and uncertainties over what the Fed might say about the economy and its policy stance overshadowed concerns about the euro zone debt crisis and poor economic news, analysts said.
The government reported durables goods orders in March fell 4.2 percent in March, their biggest monthly drop in three years, as a result of a decline in aircraft demand and as global growth slows.
Earlier, investors received the sobering news the British economy contracted again in the first quarter, marking its second recession since the worldwide financial crisis more than three years ago.
On slightly below average trading volume, Treasuries prices briefly pared losses on the disappointing durable goods data, but resumed their decline, posting session lows shortly thereafter.
In the open market, benchmark 10-year notes last traded down 9/32 in price, yielding 2 percent, up 3 basis points from late on Tuesday. The 10-year yield flirted with a two-month low on Monday on worries about possible political upheaval in France and the Netherlands.
The 30-year bond was down 18/32 in price to yield 3.16 percent, up 3 basis points from Tuesday's close.
EARLY AUCTION
On a "when-issued" basis, traders expected the new five-year notes to sell at a yield of 0.896 percent in early action, according to Tradeweb. This was slightly above the record auction low of 0.880 percent set back in December.
"People are a little nervous before this early auction," Mitsubishi Roth said, adding the bond market might be overbought in reaction to the weaker-than-expected March US payroll report 2-1/2 weeks ago.
The Treasury Department will complete this week's auctions with a $29 billion offering of new seven-year debt on Thursday.
The five-year note auction will take place at 11:30 a.m. (1530 GMT), earlier than the usual 1 p.m. (1700 GMT) to accommodate a series of announcements from the Federal Reserve.
The Federal Open Market Committee will release its policy statement at about 12:30 p.m. (1630 GMT). The Fed's economic staff will release its updated economic forecasts at 2 p.m. (1800 GMT). Fed Chairman Ben Bernanke will hold a press conference at about 2:15 p.m. (1815 GMT).
The US central bank is widely expected to cling to its near-zero interest rate policy until at least late 2014. Most economists anticipate it would refrain from further large-scale purchases to help the US economy which has been expanding, albeit at a below-average pace since the end of the worst recession in 70 years.
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