Bonds slip as stock gains damp safe-haven bid

NEW YORK: US Treasury prices slipped on Tuesday before a 10-year note auction as stocks clung to the plus column, damping demand for safe-haven US government debt.

Preparation for a 1 p.m. auction of $21 billion in 10-year notes also drove some of the selling which occurred despite a weak Italian bond auction earlier in the day. US stocks rose on Tuesday led by big-cap technology shares.

"You've got kind of a turn away from the flight-to-quality bid, and all of a sudden you've got to bid on 10-year notes at one o'clock, so 10s and 30s are leading prices lower," said Richard Gilhooly, interest rate strategist at TD Securities in New York.

The steeper losses in long-dated securities stood in contrast to the recent outperformance of those instruments relative to shorter maturities. That trend emerged when markets began to price in another potential round of monetary easing.

Though the method of such monetary accommodation remains uncertain and the notion of more easing, itself, will face some opposition at next week's Fed policy meeting, the possibility the Fed would either buy more bonds or increase the average maturity of its holdings has favored long-dated issues.

Thirty-year bonds fell 1-3/32 in price, their yields rising to 3.31 percent from 3.25 percent on Monday.

The Treasury Department is preparing to sell $21 billion in re-opened 10-year notes at 1 p.m. (1700 GMT) in the second of three auctions scheduled this week.

Before the auction, 10-year notes were down 11/32 on the day, their yields rising to 1.99 percent from 1.95 percent on Monday.

Raymond Remy, a trader at Daiwa Securities, said a 10-year yield above 2 percent would draw more buyers.

The 10-year is set to break a record low in auction yield, anyway, beating the previous record of 2.14 percent set at last month's auction.

Activity in the Treasury market was light, however.

"Volumes are a bit depressed this morning. We've seen Treasuries stabilize in a range so there isn't a lot of action going on," said Gennadiy Goldberg, fixed income strategist at 4Cast Inc.

"It's risk-on, risk-off so quickly that people have been sitting on the sidelines for the past week or so," he said.

Justin Lederer, interest-rate strategist at Cantor Fitzgerald in New York, said buyers would be wary.

"Most (traders) will be extremely cautious in their setups ahead of 1 p.m. given the potential for breaking news at any point and a safe-haven bid materializing, especially near the European close," he wrote in a note to clients.

Copyright Reuters, 2011