US Treasuries rose Wednesday, with longer-dated yields dipping to the lowest in three weeks as worries over the outcome of the European debt crisis drove safe-haven buying of US government debt. Traders also cited unwinding of some bets set up before the Federal Open Market Committee released its monetary policy statement on Tuesday. The FOMC kept Fed policy unchanged.
Raymond Remy, a trader at Daiwa Securities in New York, said some Treasury traders had bet that the Fed would lower the discount rate. That led them to bet that prices in the long end of the Treasury market-10-year notes and 30-year bonds-would fall. When the opposite occurred, traders began unwinding those bets.
"Today, as a follow-up to that trade yesterday, the unwind, it continued," Remy said. "Following yesterday's great, great 10-year auction you had a great bond auction. That means there was real demand for the 30s. The three-year which was auctioned on Monday is underwater, but 10s and 30s have a profit."
The Treasury Department's $13 billion sale of 30-year bonds drew demand strong enough to set the auction high yield at a record low of 2.925 percent, lower than the open market yield at the time. The sale was the third of seven debt sales over an eight-session period, under which the Treasury is expected to move $177 billion of debt. Despite the record low auction yield, auction buyers profited and by the end of the day the 30-year yield had dropped further, to 2.90 percent, the lowest since November 25.
"The rally (in prices) and the lowest 30-year auction stop on record was no deterrent for investors who continue to dive into US government bonds, and pay up to do so when they can get liquidity," said John Brigs, head of US interest-rate strategy at RBS Securities in Stamford, Connecticut.
"Of all the impressive auctions so far this week, to me this is the most impressive." Two earlier auctions - $32 billion of three-year notes on Monday and $21 billion of 10-year notes on Tuesday - also attracted aggressive bidding, demonstrating investors' conviction that Treasuries, regardless of their paltry yields, are the best place to be as the year draws to a close.
"It really seems to be all about Europe. We have been waiting more than 18 months now for them to do something significant ... but it is just not happening," said Mary Ann Hurley, vice president of fixed income trading at D.A. Davidson & Co in Seattle. Benchmark 10-year Treasury notes were trading 18/32 higher in price to yield 1.90 percent, down from 1.98 percent late Tuesday. Yields briefly dipped to 1.91 percent, marking the lowest since November 23.
Italy's funding costs reached a euro-era record at auction Wednesday, piling pressure on the new Rome government after last week's EU summit failed to convince markets the bloc's debt crisis can be resolved. Italy paid 6.47 percent to sell five-year notes just minutes after Germany placed 4 billion euros ($5.2 billion)of two-year bonds at an average yield of just 0.29 percent - a sign of how strongly cautious investors favour safety over returns. Italian 10-year debt yields jumped back above 7 percent Wednesday. Yields above 7 percent are generally seen as unsustainable.
"Euro zone issues continue to dominate the market, giving US Treasuries an insatiable bid despite US supply," said George Goncalves, head of US interest-rates strategy at Nomura Securities International in New York. Following the 1 pm (1800 GMT) bond auction, US 30-year debt was trading 2-6/32 higher in price to yield 2.90 percent, down from 3.00 percent late Tuesday.