George Goncalves Comments: Prices Rise After Strong 5-Year Auction – Reuters Online

Reuters Online, November 25, 2009

U.S. Treasury debt prices rose on Tuesday after a $42 billion auction of five-year Treasury notes attracted strong demand, indicating that investor interest in U.S. government debt remained high.

Yields, which move inversely to prices, also moved lower after the latest U.S. economic data showed weakness in the recovery, while minutes from the most recent policy meeting of the Federal Reserve reinforced the view that the U.S. central bank would not raise interest rates in the near-term.

"The continued interest in Treasuries is the result of a lack of alternatives," said Lou Brien, market strategist at DRW Trading in Chicago. "This is a flight to quantity. It’s the only game in town."

The high yield at the auction, which was part of a total of $118 billion of coupon sales this week, was below rates prevailing in the when-issued market at the auction deadline, indicating dealers were willing to pay a premium for the bonds.

"Investors are looking across other sovereign debt markets and they’re realizing that the markets that have continued to show strong bid continue to be Treasuries, so if you want to continue to put global government dollars to work you want to put them into Treasuries," said George Goncalves, the head of fixed income rates strategy at Cantor Fitzgerald.

A safe-haven bid was supported after a revision to the government’s data for U.S. third-quarter growth came in just below expectations. The government revised down its estimate of growth in gross domestic wwwuct to 2.8 percent from an initial estimate of 3.5 percent. The median of forecasts from analysts polled by Reuters was for a revision to 2.9 percent.

"This strengthens the Treasury market in the sense that to the extent we think the recovery might be subdued, there are going to be plenty of people out there who want the safety of Treasuries," said Julia Coronado, senior U.S. economist at BNP Paribas in New York.

Weakness in stocks also bolstered the safe-haven bid for lower risk government debt.

Benchmark 10-year Treasury notes were trading 10/32 higher in price to yield 3.32 percent, while two-year notes were yielding 0.74 percent from a high yield of 0.80 percent in Monday’s auction of the notes.

Fed minutes showed a slight uptick in officials’ expectations for unemployment rates along with a small increase in GDP growth forecast.

Data on Tuesday also showed U.S. home prices rose for the fifth straight month in September, but the pace of appreciation was less than expected, according to a report from Standard & Poor’s/Case-Shiller.

The S&P composite index of home prices in 20 metropolitan areas rose 0.3 percent in September, below the 0.8 percent rise forecast in a Reuters poll, after a 1.2 percent gain the prior month.