Thirty-year bonds yields may need to rise to attract investors to a $13 billion auction of the long bonds on Thursday, after Wednesday's sale of 10-year notes priced at a slight concession. A continuing squeeze on very short-dated debt, meanwhile, sent three-month Libor rates to a 13-month low on Wednesday, and the debt shortage could pressure the Federal Reserve to intervene if it gets worse, analysts said.
Treasuries prices rose on Wednesday in choppy trade, boosted by President Barack Obama's plan to cut the US budget deficit by $4 trillion. Prices also rose as investors covered bets that yields would rise, said James Combias, head of government bond trading at Mizuho Securities in New York.
"There's been good buying all day long. I think the market's been trading on the short side and has been forced to do some covering," he said. Prices temporarily gave up some gains after a $21 billion reopening of benchmark 10-year notes priced around one basis point higher than where the debt was trading before the auction.
The notes last traded up 6/32 in price to yield 3.47 percent, down from 3.49 percent on Tuesday. Investors may seek a similar discount in Thursday's 30-year bond sale, especially as the notes will be less attractive to dealers, who took the majority of 10-year notes on Wednesday and of three-year notes on Tuesday. "It's a real money piece of paper and some real money has a problem at these yield levels, which are very low," said Chris Ahrens, interest rate strategist at UBS Securities in Stamford, Connecticut.
The Federal Reserve has been focusing most of its debt purchases in maturities of 10-years or less, which reduces the appeal of long bonds to dealers, who may buy the debt with the intention of selling to the Fed. "I think (the auction) will get done at reasonable levels but it wouldn't surprise me if it had to be done at a little bit of a discount," Ahrens said.
Thirty-year bonds were last up 14/32 in price to yield 4.55 percent, down from 4.58 percent on Tuesday. Three-month Libor fell to its lowest level since March 2010 on Wednesday as a shortage of short-dated debt continued to pressure collateral rates in the repurchase market. The Libor rate fell to 0.27800 percent, down from 0.28075 percent on Tuesday. A shortage of Treasury bills has caused many T-bills used as collateral in the repo market to trade at negative yields, while general collateral in the market remains near zero.