Markets: News  

Treasurys fall after ECB comment, auction

NEW YORK (MarketWatch) -- Treasury prices declined on Wednesday, pushing yields up from record lows, after a top European official signaled support for boosting the effectiveness of the region's bailout fund.

The relatively weak demand for the government's 5-year bond sale also failed to affect the broader market.

Yields on 10-year notes (10_YEAR) , which move inversely to prices, rose 3 basis points to 1.42%, after touching a record low around 1.38%, according to CQG.

A basis point is one one-hundredth of a percentage point.

Yields on 30-year bonds (30_YEAR) edged up 2 basis points to 2.47%. Their all-time low was 2.445%.

Yields on 5-year debt (5_YEAR) added 1 basis point to 0.56%, while the record low was 0.535%.

Market sentiment turned during European hours after European Central Bank Governing Council member Ewald Nowotny told Bloomberg that the European Stability Mechanism, the euro zone's proposed bailout fund, should be given a banking license. See more on Nowotny, ECB.

"Treasurys were better until ECB's Nowotny said he sees reason for giving ESM a banking license," said David Ader and Ian Lyngen, bond strategists at CRT Capital Group.

Still, worries about European officials resistance to the big steps seen as necessary to truly resolve the region's sovereign debt problems are likely to keep yields low for some time, investors said.

People accept low yields on Treasurys are "not because they're happy, it's because they're nervous and want this place to hide," said Phil Condon, chief fixed-income strategist at DWS Investments.

Five-year auction

The Treasury Department sold $35 billion in 5-year notes at a yield of 0.584% -- the lowest yield on record but with metrics showing interest was tepid.

Bidders offered to buy 2.71 times the amount of debt sold, below the average of 2.89 times at the last four sales of 5-year notes, according to CRT Capital Group.

Indirect bidders, a group which includes foreign central banks, purchased 42.6% and direct bidders, a class which includes domestic money managers, bought another 5.2%.

Indirect bidders came in weaker than the norm of 48% while direct was also below the average of 10%, said Ader.

"This was a pretty soft 5-year auction with the dealer taking the lion's share ... Directs were especially soft, but indirects weren't exactly hungry," he said.

A higher proportion of an auction going to direct and indirect bidders is considered good for the market and the issuer since those buyers tend to hold on to the new debt longer.

On Tuesday, the U.S. sold 2-year notes (2_YEAR) at a record low yield, but garnered tepid demand from bidding groups besides primary dealers. Read about 2-year auction.

The U.S. will sell 7-year notes (7_YEAR) on Thursday.