Justin Lederer Comments: Prices Fall Ahead Of Debt Supply And As Stocks Rise

December 11, 2012, Reuters

U.S. Treasuries fell on Tuesday as investors pushed for price concessions going into $66 billion of government debt auctions this week and as strength on Wall Street undermined the safe-haven allure of Treasuries. Prices dipped early with cues from lower German Bunds after an unexpectedly strong reading on German investor sentiment, and in calmer Italian debt markets after a sell-off on Monday triggered by Prime Minister Mario Monti’s decision to step down early.

The Federal Reserve began a two-day policy meeting on Tuesday that is widely expected to wwwuce another bond buying program. Analysts said expectations of another Treasuries purchase program have already been priced into the market. "We are seeing a little bit of a set-up for supply, and we came in weak thanks to Germany’s investor sentiment index which climbed unexpectedly higher, so we had some spillover from declines in German Bunds," said Kim Rupert, managing director of global fixed income analysis at Action Economics LLC in San Francisco.

Germany’s ZEW economic sentiment index jumped to 6.9 in December, far higher than the -12.0 forecast and the previous reading of -15.7. Investors’ willingness to take on more risk was also supported by reports of a pick-up in the pace of talks to avert the U.S. "fiscal cliff" of steep tax hikes and spending cuts set for the new year, although Republicans and Democrats remain far apart.

Benchmark 10-year Treasury notes were trading 10/32 lower in price to yield 1.65 percent, the highest in over a week and up from 1.63 percent late Monday, while 30-year bonds were 25/32 lower in price to yield 2.84 percent from 2.80 percent. "Treasuries open the session slightly weaker this morning taking their cues overnight from Europe, mainly on the stronger than expected German ZEW report," said Justin Lederer, Treasury strategist at Cantor Fitzgerald in New York. "The down-tick however has been fairly well contained with yields in intermediates on out only two to three basis points higher, prices slightly below their post non-farm payrolls lows, and needless to say still well within the tight ranges that have been establish across the curve," he said.

After its two-day meeting, the Fed on Wednesday is expected to say it will buy $45 billion per month of longer-dated Treasuries beginning in January to replace its "Operation Twist" stimulus program, which expires at the end of December.

The Treasury will sell $32 billion in three-year notes on Tuesday, followed by $21 billion in 10-year notes on Wednesday, and $13 billion in 30-year bonds on Thursday. Traders typically will push for lower Treasury prices heading into such auctions. Ahead of Tuesday’s sale, the when-issued three-year note yield, considered a proxy for where the yield will print at auction, was trading at 0.332 percent, compared with three-year yields on the open market at 0.329 percent.