Prices fall after weak 5-year note sale

NEW YORK: US Treasury prices fell on Tuesday after a $35 billion five-year note auction drew surprisingly poor demand, while stocks rose after more reassuring news about resolving Greece's debt crisis.

The high yield at the Treasury Department's five-year note auction was significantly higher than the simultaneous open-market yield, an indicator of weak demand. Bidding statistics for the auction also showed fewer than expected customers wanting to buy five-year notes, meaning primary dealers had to absorb more of the new supply themselves.

It was the the most that primary dealers have had to absorb at a five-year auction since February. The ratio of bids to securities sold, meanwhile, was the lowest in a year.

After the auction, prices extended their earlier losses. The 10-year Treasury note lost 24/32 in price to yield 3.02 percent, up from Monday's close of 2.93 percent and above the psychologically significant 3 percent.

Five-year Treasury notes fell 19/32 in price to yield 1.58 percent, up from 1.45 percent late on Monday.

"Today's auction was another disappointment that should cast a pall over Treasuries for some sessions to come," said William O'Donnell, head of Treasury strategy at RBS Securities in Stamford, Connecticut, in a note to clients after the auction.

Treasuries were also carried lower by an uptick in stocks following news German banks were going to discuss with the government a voluntary rollover of Greek debt similar to the plan French banks adopted this week.

The major US stock indexes were each up close to 1 percent as optimism grew that the Greek government would adopt austerity measures needed to receive more international aid. Key votes are scheduled for Wednesday and Thursday in Greece.

"It's not too surprising you're getting a little bit of a relief trade, given how much stocks have fallen in the last couple of weeks," said James Combias, head of bond trading at Mizuho Securities in New York.

The retreat in Treasuries was part of that relief, traders said.

Marty Mitchell, chief market technician at Stifel Nicolaus in Baltimore, said the 30-year bond yield was close to an important technical level which, if reached, would signal a more significant move toward higher yields.

"A close above 4.30 percent would signal a deeper correction in the market," he said.

The 30-year bond last traded 11/32 lower in price to yield 4.32 percent, up from 4.297 percent at Monday's close.

Copyright Reuters, 2011