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treasury-departmentNEW YORK: US Treasury debt prices retreated on Thursday, hurt by a lackluster 30-year Treasury bond auction and renewed appetite for stocks and commodities after recent sell-offs in riskier assets.

Benchmark 10-year notes prices were down half a point in price, their yields rising to 3.22 percent, from 3.16 percent on Wednesday and 3.13 percent last week.

Major stock market indexes each rose more than 0.6 percent. Front-month US oil futures rose nearly 2 percent to $100 per barrel. The Reuters/Jefferies CRB index, a commodity price gauge, rose 0.6 percent.

Much of the bond market action on Thursday centered around the US Treasury's $16 billion 30-year bond auction, the last of the government's three refunding auctions this week.

Some price cuts occurred before the bidding deadline as dealers tried to entice buyers, but more cuts came after the deadline when it became evident the earlier price cuts had not been big enough to inspire a more robust bid.

‘Treasuries traded weaker on the day before the auction, building in a reasonable outright concession,’ said Ian Lyngen, senior government bond strategist at CRT Capital Group in Stamford, Connecticut.

‘The auction was soft, however, with low non-dealer bidding at 41.7 percent versus the 55 percent norm,’ he said.

The 10-year auction stopped at 4.38 percent, higher than the 4.353 percent when-issued bid at the bidding deadline.

The ratio of bids received to those accepted was 2.43, less than the average 2.55 for the last four 30-year bond auctions.

Consequently, Treasuries traded lower when the auction results were announced.

The somewhat soft bid for the 30-year bond auction stood in contrast to most recent Treasury auctions, perhaps because yields are now near the lows of their months-long range, said Jim Sarni, managing principal at Los Angeles, Ca.-based Payden & Rygel with approximately $60 billion in fixed income assets.

‘We're seeing a little retracement,’ he said.

Even if uncertainty is often the best friend of the safe-haven US Treasury market, Sarni said two scenarios have the potential to push Treasury prices lower and yields higher.

‘Though growth and inflation might not be as strong as once thought, the worst (of the downturn) is clearly behind us,’ he said. That limits any rationale for pushing bond prices higher and yields lower than where they are now, he said.

Second, the ‘800-pound gorilla in the room’ is that the Federal Reserve's QE2 Treasury purchase program is almost over. The second phase of monetary easing known as QE2 has kept the Fed buying Treasuries since November, typically several billion dollars of medium-range securities, several times a week.

While the Fed is expected to reinvest proceeds from the maturing Treasuries they hold, more purchases besides the ones they will have made by the end of June are not in the offing.

‘The fear is that a sharp sell-off in Treasuries could be very sharp if the market lacks sponsorship from both large institutional investors and the Fed,’ Sarni said.

If one focuses on the economic outlook, low yields are arguably justified, he said.

But technicals like supply-demand imbalance could push yields higher, Sarni said.

The Treasury's 30-year bond sale on Thursday concluded the government's $72 billion May refunding. The Treasury sold $32 billion of three-year notes on Tuesday and $24 billion of 10-year notes on Wednesday.

Reports on April US retail sales, producer prices and the latest weekly count of new jobless claims did not change the market's view of the economic outlook and so had little impact on prices.

Copyright Reuters, 2011

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