Treasurys Slump After Weak Auction

By MIN ZENG A bout of selling hit the Treasury market Thursday afternoon following a weaker-than-expected $12 billion auction of reopened 30-year bonds, the last leg of this week's $78 billion in government note and bond sales. Investors had expected strong demand following the previous day's $20 billion 10-year note sale, which was three times subscribed. The optimism had spurred strong buying in the long bond before the auction. But the rally in the 30-year Treasury bond reversed course after the 1 p.m. EDT auction, while other maturities, already under pressure from rallying stocks and commodities, fell further. The yield on the 30-year bond rose back above 4% from the intraday low of 3.956%. Late Thursday, the benchmark 10-year note was down 21/32 point, or $6.5625 per $1,000 face value, at 103 4/32. Its yield rose to 3.251% from 3.175% Wednesday, as yields move inversely to prices. The 30-year bond was down 1 25/32 points to yield 4.090%. "Looks like strong pre-auction price action pushed rates too low, too fast, and thus demand softened into the auction," said George Goncalves, head of fixed-income rates strategy at Cantor Fitzgerald in New York. Paul Horrmann, a bond-market strategist at ICAP PLC in Jersey City, N.J, said the move lower may push dealers and traders who hold bets on further gains in prices to sell Treasurys as a way to cover their long positions, which would give the market another leg down. The 30-year bond came in at a yield of 4.009%, compared with the 3.978% on the when-issued paper just before the auction. Higher yields mean weaker demand in the auction, translating to higher borrowing costs for the government and U.S. taxpayers. The bid-to-cover ratio, a main gauge of demand, was 2.37, below 2.92 for the previous auction in September and the average of 2.63 from the past four. The indirect bid -- demand from domestic and foreign institutions, including foreign central banks -- was 34.5%, down from 46.5% for September's auction and the average of 48.5% from the last four. "The auction came as a little bit of a reality check," said Chris Bury, co-head of rates trading and sales in New York at Jefferies & Co.