NEW YORK: US Treasuries prices fell on Tuesday as traders prepared for this week's wave of public and private debt supply, a day ahead of the start of a two-day Federal Reserve meeting that is expected to result in a third round of large-scale bond purchases.
In addition to $66 billion in coupon-bearing US government debt supply, an expected $30 billion or so worth of new corporate debt could hit the market this week, as investors hedged their corporate bond purchases by selling Treasuries to free up cash to buy company debt.
The supply-related selling did not push Treasuries outside their narrow trading range established after a volatile trading session on Friday when surprisingly weak jobs data raised expectations that the Fed would launch a third round of quantitative easing, dubbed QE3.
"People are expecting QE3 with higher certainty. The jobs number probably pushed it over the edge," said Cliff Corso, chief investment officer at Cutwater Asset Management in Armonk, New York, which manages $32.4 billion.
More Fed stimulus is intended to help pare high unemployment, but many economists are skeptical whether more bond purchases could achieve that goal and overcome the economic drag from the festering fiscal woes in the euro zone and United States' own $16 trillion worth of debt.
Germany's Constitutional Court said on Tuesday that it will go ahead with a long-awaited ruling on Wednesday on the legality of the euro zone's new permanent bailout fund and budget rules, despite a last-minute legal challenge by a member of parliament.
Meanwhile, Moody's Investors Service said on Tuesday the world's biggest economy may lose its top credit rating if next year's budget talks do not produce policies that gradually decrease the country's debt.
Moody's rival Standard & Poor's stripped the US of its AAA-rating last August.
Benchmark 10-year Treasuries last traded 10/32 lower in price at 99-13/32 with a yield of 1.690 percent, up 3.6 basis points from late Monday.
The 30-year bond last traded down 22/32 at 98-6/32, yielding 2.840 percent, up 3.4 basis points on the day. The 30-year bond earlier fell more than 1 point.
More cash in the banking system from more quantitative easing also raised concerns about rising inflation, which hurt long-term bond returns.
Traders have speculated on details of another round of quantitative easing, including whether the Fed will announce open-ended purchases or commit only to buying on a month-to-month basis, and if purchases would extend to other assets including mortgage-backed debt.
Interest rates futures implied traders are betting the Fed would prolong its near-zero interest rate pledge into 2015 from its current late 2014 guidance.
There was also chatter about whether the Fed might tweak its Operation Twist including ending the sale of its short-dated Treasuries holding.
HEAVY SUPPLY
Until the Fed delivers its announcement on Thursday, traders and investors are expected to adjust their portfolios to absorb this week's Treasuries and corporate debt supply.
Robust demand for $32 billion of three-year government debt supply reduced some anxiety about wobbly demand for Treasuries an d briefly pared market losses.
"You saw a knee - jerk (price pop) after the three-year auction faded. People used the opportunity to set u p shorts for the rest of the auctions," said Carl Lantz, chief US interest rate strategist at Credit Suisse in New York.
The ratio of bids for the three-year note issue due in September 2015 to the amount offered came in 3.94, the highest ever at a three-year auction.
However, the US Treasury's sale of $21 billion of 10-year supply on Wednesday and $13 billion in 30-year bonds on Thursday might be more complicated than the three-year auction.
"Not only is 30s normally a difficult auction but it's an hour in front of the Fed, so it will be interesting to see how the Street sets up for the auction," said Jason Rogan, director of Treasuries trading at Guggenheim Partners in New York.
In the "when-issued" market, traders expect the upcoming 10-year note issue due August 2022 to yield 1.683 percent , compared with 1.680 percent in August.
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