Treasuries rise

US Treasury debt prices rose on Thursday in a relief rally after the last of three Treasury debt auctions was met with solid investor demand, alleviating concerns over any waning appetite for government debt. Short-term Treasury bill rates also pushed lower.
The shorter-dated side of the Treasury yield curve was expected to steepen after the Treasury Department said it would shrink its Supplementary Financing Program - money held at the Federal Reserve for emergency lending facilities - to $5 billion from $200 billion.
The Treasury made the move on Thursday to avoid hitting the US debt ceiling. As of Tuesday, the Treasury's remaining borrowing authority was down to $279 billion, which was all that remained before it pushes up against a $14.294 trillion debt ceiling. Because the shrinking of the SFP was expected to be temporary, and result in decreased short-term debt issuance, the Treasury yield curve anywhere between four-week bills and one-year Treasury notes could be expected to steepen, said John Canavan, market strategist at Stone & McCarthy Research Associates in Princeton, New Jersey.
"In particular, the bill curve will steepen - that is where its impact will be felt the strongest is in the bill sector," Canavan said. David Ader, head of US government bond strategy at CRT Capital Group in Stamford, Connecticut, said the Treasury's move could "presage something of a collateral squeeze" and said that could tend to steepen the yield curve.
Four-week bill yields dipped on Thursday to about 0.13 percent, the lowest since January 4, from about 0.15 percent late Wednesday. Further out the curve, benchmark 10-year Treasuries traded 6/32 higher in price to yield 3.39 percent, down from 3.42 percent late Wednesday. Treasuries pared early losses to move into positive territory after the auction of $29 billion of seven-year notes.
The sale concluded a "hat trick of strong auctions," said George Goncalves, head of US interest rates strategy at Nomura Securities International in New York. The Treasury issued a total of $99 billion of two-year, five-year and seven-year notes this week. Seven-year Treasury notes traded 5/32 higher in price to yield 2.72 percent, down from 2.74 percent late Wednesday, while 30-year Treasury bonds were 7/32 higher to yield 4.57 percent from 4.59 percent. Standard & Poor's cut Japan's credit rating on Thursday for the first time since 2002, though the move appeared to have little market impact outside Japan.
Standard & Poor's lowered Japan's long-term sovereign debt rating by one notch to AA-minus, three levels below the highest possible rating. In the past, markets have not worried much about Japan's high debt because of the country's ample domestic savings and because few foreign investors hold Japanese government bonds. But this time the ratings move on Japan also pushed credit default swaps on triple-A rated debt higher, with the spread on German CDS reaching the highest level since March 2009 at 63 basis points.