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Treasury sale, spiking oil swing bonds
Treasury debt sale attracts fewer foreign banks than expected; oil sends Street to safety of bonds.
August 10, 2005: 4:14 PM EDT
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NEW YORK (CNN/Money) - Treasuries dropped Wednesday on news that the Treasury's sale of five-year notes drew less-than-usual demand from foreign banks but recovered as investors fled equities for safer terrain on news of soaring oil prices.

The benchmark 10-year note was unchanged at 97-28/32, to yield 4.39 percent, down slightly from 4.40 late Tuesday. The 30-year bond was down one tick to 111-30/32, to yield 4.58 percent. Treasury prices and yields move in opposite directions.

In shorter-term debt, the five-year note was unchanged, yielding 4.24 percent. The two-year note was also unchanged, yielding 4.12 percent.

The Fed raised the federal funds rate Tuesday by a quarter percentage point to 3.5 percent, as expected. The federal funds rate, also known as the overnight rate, affects the rate banks charge their customers.

Holders of treasuries -- who fear inflation because it erodes the value of fixed-interest investments -- rallied on the announcement, which offered no major changes and didn't fan concerns about inflation. (Full statement.)

Wednesday's sale of $13 billion in new five-year notes drew only meager demand from indirect bidders, a category that includes foreign central banks, which have been among the main forces behind the year-long bond rally.

The debt was sold at a high yield of 4.223 percent, and garnered 2.92 times the number of bids per amount of notes on offer, much stronger than the 2.39 percent average so far this year.

The trouble was, indirect bidders took home only $2.79 billion or 21.5 percent of the sale, saddling primary dealers with the rest.

"The auction itself was pretty decent but the foreign participation was lacking," said Alan DeRose, a trader at CIBC World Markets. Offshore central banks, particularly those of China and Japan, are huge holders of Treasuries, cornering more than a quarter of marketable Treasuries.

This was due in part to large-scale currency interventions which left them with excess dollar reserves. These had to be channeled somewhere, and Treasuries seemed the safest bet.

But after China's revaluation last month, some investors are concerned this will mean fewer intervention dollars and therefore less demand for Treasuries.

In the afternoon, oil prices spiked, scaring investors from stocks on worries that higher fuel prices will eventually lower corporate profits.

This brought more investment activity to bonds -- and a mild uptick -- late in the session.

In currency trading, the dollar fell against the euro and yen.

The dollar bought ¥110.63, down from ¥111.98 late Tuesday, while the euro bought $1.2379, up slightly from $1.2373 in the previous session.

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