US Treasury prices fell on Tuesday as expectations Greece will approve an austerity plan to win financial aid and avoid a debt default dampened the bid for safe-haven US government debt. Investors' lack of appetite for Treasuries was evident in the weakest sale of five-year Treasury notes in a year.
The $35 billion five-year note auction was the second of the Treasury's three note sales this week. The improved prospects for Greece and rallies in equities and commodities knocked US bonds off balance, analysts said. Major US stock market indexes all advanced more than 1 percent.
After a rally sent US Treasury yields to six-month lows, recent weak note auctions mark at least a temporary shift in tone, said Justin Lederer, Treasury analyst at Cantor Fitzgerald. The Treasury sold two-year notes on Monday. Selling persisted after the five-year note auction, with intermediate-term securities taking the brunt of the bruising. Selling in the intermediate sector also recognised the imminent end of the Federal Reserve's second phase of large-scale asset purchases, largely in the intermediate sector, designed to facilitate lending and economic growth.
Ten-year Treasury notes lost 28/32 in price, allowing their yields to rise to 3.04 percent, up from Monday's close of 2.93 percent and Friday's close of 2.87 percent. Strategists at Bank of America Merrill Lynch's mid-year outlook said on Tuesday that if the economy's current soft patch looked as if it could devolve into a recession, the Fed could implement a third phase of quantitative easing.
For now, however, more large-scale asset purchases do not seem to be in the cards, they said. "The threshold for QE3 would be higher than it was for QE2," said Ethan Harris, head of developed markets economic research for the firm. "It would take quite a bit of economic weakness for the Fed to pull the trigger." Five-year Treasury notes fell 20/32 in price to yield 1.59 percent, up from 1.45 percent late on Monday. The 30-year bond fell 15/32 in price while its yield rose to 4.33 percent from 4.30 percent on Monday.