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Treasuries weaken amid new supply

January 24, 2007 | Financial Times

US Treasuries weakened on Tuesday as traders braced themselves for a heavy flow of new paper this week.

An $8bn sale of 20-year Treasury inflation-protected securities (TIPS) on Tuesday afternoon met strong interest from investors conscious of continuing inflationary pressures in the US economy.

However, a bearish Treasury market failed to take heart from the successful TIPS auction, the first of three debt sales this week. The Treasury said it would sell $20bn of two-year notes on Wednesday and $13bn of five-year notes on Thursday.

The US bond market is likely to remain range-bound this week, “waiting for a fresh breeze from the economic data”, said William O’Donnell, strategist at UBS.

Traders looked ahead to data on new mortgage applications, due on Wednesday, and other housing indicators later in the week.

By late afternoon in New York, the yield on the benchmark 10-year bond was up 5.1 basis points to 4.812 per cent. The two-year note yield was up 3.5bp at 4.950 per cent.

UK gilts were weaker ahead of the release on Wednesday of the minutes from the Bank of England’s last interest-rate setting meeting when it raised rates to 5.25 per cent.

In late trading, the yield on the 10-year gilt rose 1bp to 4.900 per cent and the yield on the two-year gilt edged up 0.7bp to 5.498 per cent.

An industrial trends survey from the CBI, the business group, provided further evidence of strengthening industrial conditions.

Paul Dales, UK economist at Capital Economics, said: “Overall, although we remain sceptical that the outlook for industry is as good as this survey suggests, the strength of the latest industrial indicators will allow the [BoE] to raise interest rates further in order to contain price pressures without fear of bringing industry to its knees.”

Eurozone government bonds were also lower as the yield on the 10-year Bund rose 1.5bp to 4.026 per cent and the two-year Schatz was yielding 3.948 per cent, 2.3bp higher. The Japanese government bond market settled down as the yield on the 10-year ticked up 1bp to 1.665 per cent.


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