Treasuries retreated sharply Thursday, pushing yields to five-month highs after a weak auction of 30-year bonds reinforced a rout first triggered by a decline in jobless claims.
The latest round of selling added fresh momentum to a downturn in bonds that began in mid-March, immediately after the Federal Reserve announced its intention to intervene in the market with up to $300 billion in direct purchases.
Since that time, evidence of stabilization in some sectors of the economy has driven a huge rally in equities, which have surged about 30% in just two months, to the detriment of safe-haven government securities.
“The data have gotten less horrendous,” said David Ader, head of government bond strategy at RBS Greenwich Capital. “The market is long and underwater.”
With government deficits also making headlines after President Obama’s budget cuts were met with some disappointment from fiscal hawks, the dive in Treasuries took on a snowball effect.
The benchmark 10-year note’s yield soared 18 basis points to end at 3.34%, its loftiest since November.
The 30-year bond fell about 3 full points in price, pushing the yield to 4.29%. The two-year note rate surpassed the 1% mark for the first time in nearly two months.
Some of the early slippage in bonds was related to fears about just how well the market would absorb the $14 billion in 30s. As such concerns proved well-founded, bond bears ramped up their sell orders.
The auction was met with bids worth 2.14 times the amount on offer, below the historical average. At 33%, indirect bidding was rather firm. But traders pointed to a large gap between the lowest yield bid at auction and the average yield — a differential known as a tail.
“It was so poorly priced,” Lou Brien, a market strategist at DRW Trading, said of the auction. The market, having breached key yield levels to the upside, is now “in bad technical shape,” he said.
In the end, the government was forced to pay up, highlighting the possibility that an expected $1.75 trillion deficit for 2009 will eventually raise the cost of borrowing for the Treasury.
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