US Treasury prices fell on Tuesday in a market traders said took its tone in part from hedging operations at the start of a heavy week of corporate bond issuance. New corporate bond deals are expected to total between $20 billion and $25 billion for the holiday-shortened week, according to IFR. Before corporate bonds are issued, their underwriters, usually large investment banks, often sell US Treasuries to hedge against changes in interest rates.
The inflation worries played out in the market for Treasury Inflation Protected Securities on Tuesday. TIPS performed better than regular Treasuries, with the spread between 10-year TIPS and 10-year Treasury note yields growing to 2.41 percentage points, near its widest in a year.
Wider TIPS spreads and a steeper yield curve suggest traders are pricing in faster growth and inflation despite recent data signalling moderate growth and tame inflation. TIPS also got a boost from the Fed, which bought $1.74 billion in the securities on Tuesday as part of its $600 billion Treasury purchasing program, known as QE2, designed to support economic recovery.
This reduction in TIPS outstanding will be offset by a record $13 billion offering of new 10-year TIPS on Thursday. Talk swirled about whether a large, erroneous sale of long-dated bonds had triggered a sudden market sell-off on Tuesday morning. Benchmark 10-year notes last traded down 11/32 in price to yield 3.37 percent, up from 3.33 percent on Friday. The market was closed on Monday for the Martin Luther King Jr. Day holiday. The 10-year yield is establishing a short-term technical range between 3.25 and 3.50 percent, analysts said.
The 30-year bond fell 17/32 to yield 4.56 percent, up from 4.53 percent late on Friday. Earlier in the day the 30-year yield touched 4.61 percent, just short of the intraday high of 4.625 percent on December 15 - which was the highest since late April, according to Reuters data. The spread between the two-year and 30-year yields hit a record at 400 basis points versus 395 basis points Friday.