Treasurys Trade Mixed Following Lackluster Auction

Treasury prices were mixed Tuesday following a lackluster auction of $42 billion of two-year notes.

Overall demand was weaker than at a similar auction in June, and foreign investors appeared to be buying fewer notes. The government is relying on central banks around the globe to buy its debt and help fund its economic stimulus programs, so a drop off in foreign demand is worrisome.

The price of the two-year note, which had been holding steady ahead of the auction, turned lower following the announcement of the results, while longer-term Treasurys came off their earlier highs.

The auction's bid-to-cover ratio, a measure of demand, was 2.75 percent compared with 3.19 percent at an auction of two-year notes in June. Indirect bids, an indication of foreign buying, dropped to 32.97 percent of the total bids accepted from 68.74 percent in June.

"As of this moment, the safe havens are not as attractive," said Jessica Hoversen, a fixed income and foreign exchange futures analyst with MF Global in Chicago. "I think the market is still very cautious and there are still questions over economic growth, but people are more willing to take risk now than they were back in the fall or even in the first quarter of this year."

In late afternoon trading, the two-year note slipped 3/32 to 100 2/32, while its yield rose to 1.08 from 1.05 percent late Monday.

The benchmark 10-year Treasury note rose 9/32 to 95 13/32. Its yield fell to 3.69 percent from 3.73 percent.

The 30-year bond rose 1 8/32 to 95 6/32, and its yield fell to 4.55 percent from 4.63 percent.

The yield on the three-month T-bill dipped to 0.17 percent from 0.18 percent. Its discount rate was 0.18 percent.

The auction came at the start of a week of record Treasury debt issuance, in which the government is auctioning off more than $200 billion of bills and notes.

Investors fear that the vast amounts of debt being issued by the government to fund its economic stimulus programs will outrun demand. That in turn would force the government to increase the returns on bonds to make them more attractive to investors, and the higher yields will affect interest rates throughout the economy.