Treasurys Up On Decent Demand For 30-Yr Bond Auction,Weak Data

By Min Zeng Of DOW JONES NEWSWIRES NEW YORK (Dow Jones)--Treasury prices rose Thursday afternoon on a strong 30-year bond auction following a bout of U.S. data that damped optimism on a quick turnaround in the economy. Long-dated Treasurys led the gains as they benefited the most from the successful 30-year bond sale with a record size of $15 billion. Treasurys have been well-bid so far this week, with the 10-year note's yield falling more than 25 basis points from the week's peak set on Monday. Traders said part of the buying Thursday afternoon was a result of the 30-year auction turning out better than expected. Many market participants who had put bets on further declines in bond prices, known as shorts, were caught off-guard and had to buy back Treasurys to cover the shorts on the heels of the auction. Demand on long-dated Treasurys also picked up after the Federal Reserve reassured investors Wednesday afternoon that inflation pressure remained subdued in the near term. Inflation erodes bonds' fixed interest payments over time, and the longer the maturity, the bigger the potential losses due to a rise in consumer prices. The 30-year bond auction wrapped up this week's $75 billion Treasury note and bond supply. The $37 billion three-year note supply Tuesday enticed strong demand, while the $23 billion 10-year note auction Wednesday was less well-received, mainly because it came less than two hours before the outcome of the Federal Reserve's monetary-policy meeting. A proxy of foreign demand, including demand from foreign central banks, was strong throughout all three auctions. That should be a relief to the U.S. government as it is selling record amounts of debt this year to finance programs to get the economy back on track. So far, Treasury auctions have managed to entice investors even as the sizes of the auctions have steadily increased. "It is a relief to get through another round of supply," said Chris Ahrens, head of U.S. interest rate strategy at UBS Securities LLC in Stamford, Conn. Ahrens said with debt supply still sluggish in the private credit market following the financial crisis, Treasury auctions still drew demand despite the increasing size of the auctions. In recent trading, the two-year note's price was up 1/32 at 99 25/32 to yield 1.12%, the 10-year note was up 25/32 to 100 3/32 to yield 3.61%, and the 30-year bond was up 1 5/32 at 96 21/32 to yield 4.45%. Bond yields move inversely to prices. The 30-year bond auction came in at a yield of 4.541%, matching the when-issued paper just before the auction. The bid-to-cover ratio, a main gauge of demand on the auction, was 2.54, compared with 2.36 for the previous auction in July, which was a reopening issue for the June auction, and the average of 2.31 from the past eight auctions. The indirect bid - demand from domestic and foreign institutions, including foreign central banks - for the 30-year bond auction was 48.05%, compared with 50.2% from the previous auction in July and the average of 35.8% for the last eight auctions. "This auction was a good capping stone to an overall smooth August refunding. The appetite for 30Y duration was impressive," said George Goncalves, head of fixed-income rates strategy at Cantor Fitzgerald in New York. With this week's supply out of the way and no supply until the end of the month, Goncalves said longer-dated maturities should be "the best performing sectors on the curve as seasonals carry us to higher prices and lower yields." In economic data, the Labor Department reported initial claims for jobless benefits rose by 4,000 to 558,000 on a seasonally adjusted basis in the week ended Aug. 8. The four-week average of new claims, which aims to smooth volatility in the data, rose by 8,500 to 565,000 - the highest since July 18. Retail sales last month dropped 0.1%, the Commerce Department said Thursday. Economists surveyed by Dow Jones Newswires forecast a 0.8% increase in July retail sales. June sales rose 0.8%, revised up from an originally reported 0.6% increase. -By Min Zeng, Dow Jones Newswires; 212-416-2229; min.zeng@dowjones.com