Treasurys mixed

NEW YORK (AP) — A strong auction of three-year Treasury notes Tuesday convinced some investors to buy back into shorter-term government debt.

The gains were small, though, and the Treasury's 30-year bond fell. Traders were less sure that upcoming auctions of 10-year and 30-year Treasurys will go as smoothly.

"There's little more trepidation ahead of the longer-dated auctions," said Kim Rupert, managing director of global fixed income analysis at Action Economics. In the back of investors' minds, she said, is the fear that an auction will go badly — perhaps not this week, but eventually. A poor auction would indicate that demand for government debt is drying up.

As a result, yields will probably keep heading upward, Rupert said.

The yields on two-year, 10-year and 30-year Treasurys have recently reached their highest levels in more than six months. That's been contributing to a rise in mortgage rates; last week, Freddie Mac said the average rate on 30-year mortgages jumped above 5 percent for the first time in nearly three months after hitting record lows in April.

Investors have been selling off Treasurys because of the government's swelling debt load. The concern is that supply is rising too high, and will lead to rampant inflation, which eats into bonds' fixed returns over time.

The Treasury Department auctioned $35 billion in three-year notes Tuesday. Demand was strong, particularly from foreign buyers. The ratio of bids to notes sold was 2.82 — much higher than it has been in recent debt sales.

But investors are more concerned with Wednesday's auction of $19 billion in 10-year notes and Thursday's auction of $11 billion in 30-year bonds. Any indication that demand, especially from foreign central banks who are among the Treasury's biggest customes, is waning would signal problems to the market.

By late trading on Tuesday, the 10-year Treasury note rose 2/32 to 93 30/32. Its yield slipped to 3.86 percent from 3.89 percent late Monday. On Monday, the 10-year yield hit a seven-month high of 3.93 percent.

The yield on the two-year note fell to 1.32 percent from 1.42 percent, as its price fell 6/32 to 99 4/32. On Monday, the two-year yield hit a six-month high of 1.45 percent.

The yield on the three-month Treasury bill slipped to 0.17 percent from 0.18 percent. Its discount rate was 0.18 percent.

The yield on the 30-year bond rose to 4.67 percent from 4.62 percent, as its price fell 25/32 to 93 11/32. The 30-year yield reached 4.70 percent last Friday, its highest yield since last August.

Borrowing costs between banks remain near record lows on continuing signs that the banking industry is healing.

The British Bankers' Association said the London Interbank Offered Rate, or Libor, on three-month loans in dollars was flat at 0.65 percent. On Monday it had edged up 0.02 percentage point from an all-time low.

The Treasury Department announced Tuesday that it is allowing 10 large financial institutions, including JPMorgan Chase & Co, Goldman Sachs Group Inc., and Morgan Stanley, to pay back government bailout funds.



by the associated press