Turbulent Treasuries

December 14, 2011

The U.S. Treasury bond market may be in for a bit of a rollercoaster ride over the near term as each new day seems to bring another deluge of debt, with the government trying to clear out all it can before the holidays. The Treasury on Wednesday sold $13 billion of reopened 30-year bonds, and investors dove in to scoop up the debt even though yields are hovering near record lows. Wednesday’s sale was the third of seven debt sales over an eight-session period, in which the Treasury is expected to move a total of $177 billion of paper. The rush of paper could give Treasuries a shaking.

Priya Misra and Marcus Huie, strategists at Bank of America Merrill Lynch, said in a research note:

The next week could see some choppy price action in the Treasury market. And not just because of concerns about Europe. Treasury investors have to absorb a very heavy supply calendar over the next week. Normally supply across the curve is spread out over a month, but the Treasury moved up its end-of-month auctions to avoid auctioning in the holiday week. We believe that short positioning of investment funds and foreign demand should help absorb the supply, but the market will likely attempt to set up before each auction. This should result in greater intra-day volatility in Treasuries.

Indeed, benchmark 10-year Treasury yields fell to 1.90 percent on Wednesday, marking the lowest in three weeks. Still, it has been home on the range for bonds since Nov. 1, with 10-year yields tracking between 1.87 percent and 2.17 percent while everyone ponders if and when European banks might start to crumble. More auction successes could see yields pry open that six-week yield range.

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