Treasurys Losing Streak Hits Three

Treasurys Losing Streak Hits Three

By DEBORAH LYNN BLUMBERG

NEW YORK—Treasurys prices dropped Monday for a third straight session as investors took heart from some encouraging pieces of news on the Japan nuclear crisis, and after the U.S. Treasury surprised the market with plans to start selling mortgage-backed securities.

Japanese authorities reported progress over the past 24 hours in containing the nuclear crisis, having made some progress in the twin goals of cooling reactors at the Fukushima Daiichi nuclear power plant and restoring electric power to internal cooling systems. The plant was damaged in the earthquake that hit the country 10 days ago and concerns about radiation leakage have roiled global financial markets over the last week.

The news helped encourage market participants to tiptoe back into riskier assets, such as stocks, and part with low-risk U.S. Treasury securities.

"The situation is slowly getting better" in Japan, said Adam Brown, managing director of U.S. government bond trading at Barclays Capital Inc. in New York, though developments in the country remain a primary focus for the market. "Right now, this market is being driven by geopolitical events," he said, "and first and foremost is Japan."

In afternoon trading, the price of the benchmark 10-year Treasury note was off by 16/32 to yield 3.326%; the two-year's price was down 3/32 for a yield of 0.637%. Yields move inversely to prices.

Treasurys prices were also under pressure after the Treasury Department's surprise announcement that it will start selling off the $142 billion portfolio of agency guaranteed mortgage-backed securities it purchased during the financial crisis.

"The market was not prepared for this," said Tom Tucci, head of government bond trading at RBC Capital Markets. The move means more intermediate government securities will come back into the market, which will weigh especially on Treasurys maturing in the next five to 10 years.

Mr. Tucci, however, said "people who are trying to make this sound like the beginning of a rate rise are out of their minds."

The Treasury said it will sell about $10 billion a month, depending on market conditions, and could wind down the program in about a year. The government acquired the securities—mostly 30-year, fixed-rate MBS guaranteed by either Fannie Mae or Freddie Mac—from October 2008 to December 2009 to help stabilize the mortgage market.

The Treasury is selling the securities now because the market has "notably improved," according to a department statement. A Treasury official said the program could net about $15 billion to $20 billion in profits for taxpayers.

There was heavy selling after the news as some market participants misunderstood the announcement as coming from the Federal Reserve and signaling a chance in monetary policy. When those investors realized that that wasn't the case, the market managed to recoup some ground into the afternoon.

The longer-term impact of the Treasury mortgage selling on the market is likely to be subdued, Mr. Brown said, given the small amounts.

Selling "is just not that big compared to the sizes and volumes that go through the Treasurys market," said Mr. Brown.

Meanwhile, investors were also tuned into news coming from the Middle East. Allied air strikes against Moammar Gadhafi's forces in Libya further escalated a conflict that has disrupted the country's oil exports for a month. Yet the establishment of a no-fly zone calmed market participants, at least for the time being.

The development was "seen as a decisive action, which encourages risk-taking," said Richard Gilhooly, a strategist at TD Securities in New York.

Write to Deborah Lynn Blumberg at deborah.blumberg@dowjones.com