The prices of US Treasury securities rose on Tuesday in a vigorous afternoon rally after a strongly bid 10-year note auction displayed enduring demand for safe-haven assets. Treasuries' late-day rally intensified after the Federal Reserve left its monetary policy unchanged, as US stocks gave up their gains and the euro fell against the dollar.
"It's not like anything in the (FOMC) statement told people to go out and sell things, but they may have been waiting to take such actions until after they got the all clear," said Chris Ahrens, interest-rate strategist at UBS Securities in Stamford, Connecticut, referring to the Fed's monetary policy statement. "Once the Fed didn't change its communication policy or announce more quantitative easing, they decided it was OK to go out and test some of these levels."
The 30-year Treasury bond traded more than a point higher in price, finishing with strong gains just a day before the Treasury Department is to sell $13 billion in reopened 30-year bonds. The Treasury's sale of $21 billion in 10-year notes drew higher-than-expected interest from a category of bidders known as 'indirect bidders,' populated mostly by foreign central banks. That left bond dealers scrambling to buy in the secondary market what they thought they would get directly from the Treasury before being outbid at the auction.
"There was an outsized demand for this 10-year auction," said Dan Mulholland, trader at RBC Capital Markets in New York. "Indirect bidders were significantly higher than what they normally are, and dealers got less than they normally get, so there's a fair amount of short-covering going on," he said.
The auction was the second in a series of seven that will see the Treasury sell $177 billion in new debt over the course of eight business days. A sale of $13 billion in 30-year bonds is set for Wednesday, and selling could return to the Treasury market before the 30-year auction, a normal price pattern in which dealers sell the maturity that is about to be auctioned to cheapen it and get more for their bids. Benchmark 10-year notes were last trading 17/32 higher in price and yielding 1.95 percent, down from 2.02 percent at Monday's close.
Thirty-year bonds were up 1-10/32,and yielding 2.99 percent, down from 3.06 percent on Monday. One source of safe-haven demand came from new fears about the stability of Europe's sovereign debt markets and its banking system. Sources said Germany's Angela Merkel had rejected any suggestion of raising the funding limit of Europe's future bailout fund, the European Stability Mechanism.