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Treasurys slide as refunding announced

February 04, 2010 | "CNNMoney"

NEW YORK (CNNMoney.com) -- Treasury prices fell Wednesday after a report showed growth in the U.S. service sector and the government announced an $81 billion quarterly refunding.

What prices are doing: The benchmark 10-year note fell 17/32 to 97-9/32, pushing the yield up to 3.7% from 3.64% late Tuesday. Bond prices and yields move in opposite directions.

The 30-year bond slipped 1-8/32 to 95-26/32 and its yield was 4.63%. The 5-year note fell 7/32 to 99-8/32, and it yielded 2.4%.

The 2-year note ticked down 2/32 to trade at 99-31/32, yielding 0.88%.

What's driving prices: "Markets are under pressure here as we start to see some economic growth," said Peter Cardillo, chief market strategist at Avalon Partners.

The Institute for Supply Management reported its services sector index ticked up to 50.5 in January from 49.8 the previous month. Readings above 50 signal growth.

Continued heavy issuances of bonds have also weighed on the market lately, Cardillo said. He expects government debt prices to trade in a tight range as investors digest mixed reports, waiting for clear signs of economic growth.

What's on tap: The Treasury Department announced Wednesday that it is auctioning $81 billion in bonds to refund $48 billion of securities that are maturing, and to raise another $32.7 billion. The Treasury announces refundings each quarter.

Treasury plans to bring $40 billion worth of 3-year notes to market on Tuesday; $25 billion in 10-year notes next Wednesday; and $14 billion in 30-year bonds on Thursday. The auctions will settle on Feb. 16.

The refunding announced Wednesday is in addition to regularly scheduled debt sales.

Treasury cautioned that it expects to reach the debt ceiling as early as the end of February. If that happens, Treasury would not be able to issue more debt and Congress would likely be forced to raise the debt ceiling.

In a separate quarterly statement, the Treasury Borrowing Advisory Committee, a financial services industry advisory group, warned that its research indicates the government will double its debt issuance to more than $2.7 billion in 2010. It also addressed the question of where demand will come from for the projected $1.4 billion in net issuance of Treasurys in 2010.

The committee's statement said Federal Reserve data showed that foreign governments and private sources, as well as U.S. households, comprised most of the increase in supply in the first three quarters of 2009.

The advisory committee noted that the fixed-income market had been focused on mortgage bonds in the past decade. But as that sector fizzled along with the housing bust, people looking to rebalance their bond portfolios are looking to Treasurys.

By Julianne Pepitone

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