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Treasurys fall after flat auction

February 08, 2008 | "Associated Press"

Sale of 30-year Treasurys received a startlingly small response.

Treasurys sold off sharply on Thursday after an afternoon auction of $9 billion in 30-year bonds attracted disappointing demand.

The weak response was startling because the small size of the offering was believed to guarantee a solid sale.

Instead, investors bid for 1.82 times the amount of notes that were offered, a low level of demand for long-term bonds, which are the mainstay of many pension funds. There also appeared to be low interest from foreign central banks and other institutions that do not submit direct bids but are represented by third parties.

The weak showing comes at a time when investors are questioning the desirability of the 30-year long bond.

Treasury rallies in recent months drove its yield down to unattractively weak levels, as prices and yields move in opposite directions. Last month the yield slid to an historic low of 1.83 percent, causing investors to question the utility of lending money for three decades for such a poor return.

In afternoon trading, the 30-year dropped 2 8/32 to 107 15/32 with a yield of 4.54 percent, up from 4.36 percent late Wednesday, according to BGCantor Market Data.

The benchmark 10-year Treasury note fell 14/32 to 98 25/32 with a yield of 3.77 percent, up from 3.60 percent late Wednesday.

The 2-year fell 10/32 to 100 2/32 with a yield of 2.07 percent, up from 1.93 percent.

Where to invest for the short term

Earlier, Treasurys advanced after weak January sales reports from Wal-Mart Stores (WMT, Fortune 500) and other retailers pointed to slowing consumer spending.

The sales numbers suggested that people struggling with high gas and food prices and a weak housing market mainly bought necessities. This picture of restrained spending is consistent with a slumping economy but by itself does not confirm a recession, which many economists think is under way.

The sense that the economy is weakening should help persuade the Federal Reserve, which already has slashed the overnight Fed funds rate by 1.25 percentage points this year, to continue cutting rates.

Also Thursday, the Labor Department issued a report showing that the number of newly laid off workers filing applications for unemployment benefits dropped last week, but not enough to indicate strains on the labor market are easing.

There were 356,000 claims for jobless benefits last week, a decline of 22,000 from the previous week. The decline only erased a part of the huge jump of 72,000 in claims of the previous week.

The Bank of England on Thursday reduced its key lending rate by 0.25 percent to 5.25 percent, as the U.K.'s central bank noted its own slowing economy. However, the European Central Bank left rates unchanged as the euro zone is under pressure to thwart inflation in some of its member states.

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