US Treasury debt prices rallied on Tuesday after stronger-than-expected bidding in a Treasury 10-year note auction spurred buying. The $8 billion of reopened 10-years were sold at a high yield of 4.810 percent and a bid-to-cover ratio - an indication of demand - of 2.91, above the average of 2.8 for the last two such reopenings this year.
"It was all due to the 10-year note auction," said John Canavan, analyst at Stone and McCarthy Research Associates, referring to the market's turnaround after the early afternoon auction deadline.
"The whole mood changed," said Chris Rupkey, vice president and senior financial economist at Bank of Tokyo/Mitsubishi. "In the morning it looked like Treasuries were breaking down, but all that was cleared away by the auction results and the tone became full speed ahead."
In late trade, ten-year notes were up 7/32 in price for a yield of 4.78 percent, versus 4.81 percent late on Monday. Bond yields and prices move inversely.
Two-year notes traded up 1/32 in price to yield 4.82 percent, compared with 4.84 percent on Monday.
Some analysts said bond prices could go still higher, but others said brakes could be applied ahead of key data due later this week, mainly August retail sales numbers on Thursday and the consumer price index on Friday.
"We'll run into some resistance here, meandering and waiting for retail sales and the CPI later this week and next week, the FOMC," Canavan said, referring to the Fed's policy-making Federal Open Market Committee (FOMC).
Analysts said the 10-year note auction's 2.91 bid to cover ratio was above the average for the last four auctions and even stronger than in August, when the 10-year note sale was the second part of the Treasury's three-part quarterly refunding.
Indirect bidders, which include customers of primary dealers and foreign central banks, took $1.50 billion or 18.7 percent of the auction, above an average of 9.8 percent for the last two such reopenings this year. "The indirect bid, also known as a measure of foreign interest, was not bad," Rupkey commented.
In late trade, ten-year notes were up 6/32 in price compared with Monday's closing levels, yielding 4.78 percent, versus 4.82 percent just before the auction and compared with 4.81 percent late on Monday.
Bond prices rose even though stock prices rallied on a sharp drop in oil prices. The crude oil price drop fuelled optimism in equities that receding energy costs would boost consumer spending and corporate profits and ease inflation pressures. The Dow and the S&P 500 each rose more than 1 percent, while the Nasdaq climbed 2 percent.
For bonds, a stronger economy would be bearish, raising the possibility that the Fed could step off the sidelines and resume raising interest rates. But lower oil prices could also be bullish for bonds, if investors take the view that weakening oil prices will dampen inflation pressures.
"There's a tug of war about what the weakness in commodity prices would mean," Rupkey said. "On one hand you can say crude oil coming down $13 a barrel should give the economy a jump start, sending consumer spending up strongly in the fourth quarter. Anything suggesting that the Fed could come off the sidelines (and raise interest rates) is bad for bonds. On the other hand, if commodity prices are falling due to a slower economy, that would be bullish for bonds."
News that the US trade deficit widened to a record $68.04 billion in July elicited little market reaction because it reflected a temporary spike in crude oil prices and did little to alter views of the economy, analysts said.
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