Justin Lederer Comments: Longer End Prices Flat After Earlier Rising On Stocks

December 20, 2011, CNBC

Longer-dated Treasury securities traded flat after earlier rising Monday as a stock market downturn and worries about North Korea’s political situation and the euro zone debt crisis revived the bid for safe-haven U.S. debt.

Remarks by European Central Bank President Mario Draghi pouring cold water on hopes for aggressive monetary easing by the ECB discouraged investors in riskier assets and fed the bid for U.S. debt . There was also some nervousness following the death of North Korean leader Kim Jong-il, though the impact of this had faded somewhat during the New York session.

The Federal Reserve’s purchase of $4.898 billion in long-dated Treasury bonds maturing from December 31, 2017 to November 15, 2019 also lent a little support to the medium- to longer end of the maturity curve.

Despite the mild selling pressure in short-term Treasurys, the market "has a very strong underlying bid which will most likely not dissipate soon," said Justin Lederer, interest-rate strategist at Cantor Fitzgerald.

The Treasury will sell $35 billion in two-year notes at 1 p.m., the fifth auction over the past six sessions with two remaining this week: a $35 billion five-year auction Tuesday and a $29 billion seven-year auction Wednesday.

The combination of investor wariness of risk and the Federal Reserve’s pledge to keep short-term interest rates near zero at least through mid-2013 means the two-year Treasury auction should be easily underwritten, Lederer said.

"We do not anticipate the market building in much of a concession ahead of 1 p.m.," he said.

In when-issued trade, the two-year notes to be sold at 1 p.m. yielded 0.24 percent.

The ratio of bids received over those accepted was 4.07 in last month’s two-year auction, Lederer noted.

The death of North Korea’s Kim Jong-il appeared to have little impact. Investors took a wait and see approach to what ramifications a power shift in the state, which has nuclear weapons, would have on North Korean and the rest of northeast Asia.

Benchmark 10-year Treasury notes rose 1/32 in price, pushing their yields down to 1.818 percent from 1.85 percent on Friday.

The 30-year bond fell 1/32 in price to yield 2.793 percent.

Supply in the front of the curve could lead to some slight curve flattening if supply in the short to medium portion of the curve puts a bit of upward pressure on yields in that sector, while purchases at the longer end of the curve by the Federal Reserve keep down yields on long-dated Treasurys.

"The bottom line is, we’re playing the auctions versus buybacks," said David Ader, head of government bond strategy at CRT Capital Group in Stamford, Connecticut.

Headlines from the euro zone and U.S. economic data, much of it this week about the housing sector, will likely have less impact than the "immediate need to deal with flows and keep balance sheets down as the year rapidly approaches its close," Ader said.

The $99 billion of new supply will be offset by $58.2

A quirk that could affect the auctions, however, is that they do not actually settle until January 3, leaving open the possibility that year-end balance sheet considerations could affect demand, Ader said.