Govt debt prices steady, CDS activity picks up

NEW YORK: US Treasury prices rose slightly on Wednesday as investors prepared for the second of this week's debt auctions and shrugged off weaker-than-expected manufacturing data.

Treasuries have been largely range-bound for the past week and a half as yields hovered near six-month lows and key technical support levels.

Though many investors are positioned for higher yields, weak data and a continuing safety bid due to euro zone debt concerns have kept a lid on the debt, leaving many to need keep buying in order to cover short positions.

‘We seem to drift sideways regardless of the news. The threshold to break the direction one way or the other seems to be getting higher,’ said Jim Vogel, interest rate strategist at FTN Financial in Memphis, Tennessee.

New orders for long-lasting US manufactured goods recorded their largest decline in six months in April as aircraft and motor vehicle bookings tumbled, pointing to some cooling in factory activity.

Treasuries were largely unchanged on the data, confirming previous data that showed weakness.

‘We're not really responding to it. The number is still April,’ Vogel said. ‘We're waiting for a much better picture of what June is going to be like.’

Ten-year notes were last up 2/32 in price to yield 3.11 percent, down from 3.12 percent on Tuesday. The notes have tested technical resistance at about 3.09 percent -- the lowest level since early December -- three times in the past week.

Five-year notes rose 1/32 in price to yield 1.77 percent, down from 1.78 percent.

The Treasury is expected to see solid demand when it sells $35 billion in new five-year notes later Wednesday. The notes traded at yields of 1.81 percent in the ‘when-issued’ market, which indicates where traders expect it will price.

CDS LEVELS STEADY, VOLUMES PICK UP

The cost of insuring against a US default in the credit default swap market was relatively steady on Wednesday, after the contracts saw a flutter of activity in the past week on fears over political wrangling that is delaying the debt ceiling increase.

Investors made 135 trades in US CDS in the week ended May 20, far above previous weeks, when in some cases only one contract trade was seen, according to data by the Depository Trust & Clearing Corp.

This compares to 360 CDS trades in the week on Spain's sovereign debt, 191 on Greece, 142 on Portugal and 136 on Italy.

Volumes in US CDS have been ticking up, though at about $4 billion they remain significantly lower than the $9 trillion in outstanding US Treasuries.

The cost of insuring Treasuries for five years on Wednesday was little changed at around 52 basis points, or $52,000 per year per $10 million insured, after increasing from 41 basis points at the beginning of last week.

One-year contracts, which are much less liquid than five-year contracts, cost around 30 basis points on Wednesday, and have increased from around 26 basis points in the past week, Markit data show.

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Copyright Reuters, 2011