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Treasurys fall after 2-year note auction

January 29, 2008 | "Associated Press"

Despite strong domestic buyers, the sale attracted few indirect bids, which can be an indication of foreign central bank interest.

Treasury prices fell Monday following an auction of 2-year notes that attracted an unusually low level of foreign buyers.

An afternoon auction of $24 billion in new 2-year notes produced a low number of indirect bids, those made on behalf of buyers that can include foreign central banks. The poor showing reinforces concerns that central banks are diversifying their reserves away from Treasurys as they seek assets in currencies that yield more than the dollar.

However, the auction also attracted a solid level of demand from domestic buyers, garnering a 2.33 ratio of bids accepted to bids rendered. The strong domestic demand is not surprising, given numerous recent Treasury rallies.

The benchmark 10-year Treasury note fell 11/32 to 105 7/32 with a yield of 3.61 percent, up from 3.56 percent in late trade Friday. Prices and yields trade in opposite directions.

The 30-year long bond lost 16/32 to 111 18/43 with a yield of 4.30 percent, up from 4.26 percent late Friday.

The 2-year note fell 2/32 to 101 28/32 with a yield of 2.24 percent, up from 2.19 percent late Friday.

Earlier, prices were volatile after the Commerce Department reported that sales of new homes dropped a full 4.7 percent to a seasonally adjusted annual rate of 604,000 in December. The sales figure was well below the 647,000 sales seen in November and the 645,000 sales projected by Thomson/IFR.

The plunge in sales took place despite a 10 percent reduction in prices. "There is no sign yet of an end to the decline in activity and prices are collapsing," said Ian Shepherdson, chief U.S. economist at High Frequency Economics.

The report also may even overstate the strength of the building sector, since it does not include cancellations, which have rising for the past year.

The Federal Reserve is widely expected to announce an interest rate cut Wednesday, but it's uncertain whether it will be a modest or sizable reduction.

Last Tuesday, the Fed, in an unscheduled move, put in place a major 0.75 percentage point reduction in the overnight fed funds rate to 3.5 percent. Many bond market analysts initially concluded a 0.50 percentage point reduction would be announced this week. But it has since been revealed that global stock losses last week may have been driven partly by bad trades by an alleged rogue trader at Societe Generale. Those revelations have made investors less certain about what the Fed will do this week.

The market also is eager for any new details from President Bush about economic stimulus plans. He is scheduled to give his final State of the Union address after the close of trade.

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