Shorter-dated Treasuries outperform

Shorter-dated US Treasuries outperformed longer maturities on Tuesday, ending higher after an auction of three-year notes drew strong demand. Investors flocked on Tuesday to auctions of four-week Treasury bills and three-year notes. The well-bid auctions reflected a "supply shortage" at the front end of the Treasury maturity curve, said Rich Bryant, head of US Treasury trading at MF Global in New York.
Remarks late in the session by US Federal Reserve Chairman Ben Bernanke gave bond prices a small added lift, but only a temporary one. "The whole market seemed to catch a bid after the auction," said Thomas Simons, money market economist at Jefferies & Co. That bid allowed Treasuries to erase almost all losses incurred early in the session when stock market gains drew investors away from safe-haven US government debt. Wall Street stocks eventually erased gains and ended the session lower.
Trading in two- and three-year Treasury notes was heavy, said Justin Lederer, Treasury analyst at Cantor Fitzgerald. Short- and medium-term Treasuries ended narrowly higher in price while benchmark 10-year Treasury notes and 30-year bonds ended unchanged, yielding 3.00 percent and 4.26 percent, respectively.
Three-year Treasury notes rose 3/32, their yields easing to 0.70 percent from 0.73 percent on Monday. Treasury's $32 billion three-year note sale was the first of three note auctions this week. The Treasury will sell $21 billion of reopened 10-year notes on Wednesday and $13 billion of reopened 30-year bonds on Thursday. Bernanke acknowledged a slowdown in the US economy, but did not suggest the Fed was considering further monetary stimulus to support growth.
"Unless the Fed sees the economy falling back, there is unlikely to be any QE3, after the $600 billion of QE2 purchases finish at the end of this month," said Chris Rupkey, managing director and chief financial economist at Bank of Tokyo/Mitsubishi UFJ, referring to the Fed's attempt to spur lending and an economic recovery by buying US Treasuries.
As part of the QE2 program, the Fed on Tuesday bought $1.44 billion of Treasury inflation-protected securities maturing July 2013 through February 2041. Two-year notes rose 1/32, their yields easing to 0.41 percent from 0.44 percent on Monday.