Treasurys rally on strong auction
Government bonds rally on $30 billion auction of 2-year notes and report showing lowest consumer confidence level since February 1992.
NEW YORK (CNNMoney.com) -- Treasury prices rallied Tuesday, lifted by a strong 2-year note auction and a report showing consumer confidence dropped more than expected in June. All this as investors wait for the Federal Reserve's interest-rate announcement Wednesday afternoon.
The benchmark 10-year note was up 14/32 to 98 3/32, and its yield was 4.10%, down from 4.16% late Monday. The 30-year bond gained 25/32 to 95 17/32, and its yield fell to 4.65% from 4.70% late Monday.
The 2-year note rose 6/32 to 99 18/32 and the yield dropped to 2.85% from 2.94% on Friday. Bond prices and yields move in opposite directions.
A $30 billion government auction attracted a high number of bidders Tuesday afternoon, helping boost the 2-year note.
Compared to last month, "the total amount of bids was bigger this month for the same amount of bonds," said Steve Van Order, chief fixed income strategist at Calvert Asset Management. There were almost $80 billion worth of bids for $30 billion worth of notes. That translated into a bid-to-cover ratio of 2.6, which was better than the previous two monthly auctions.
"The follow through on this auction - that we have had a little rally - is the last little piece to say that this is a good auction," said Van Order.
Bond prices had eased off just before the auction. "When there is a big auction, the market needs to give investors a discount to entice the buyers to buy," said Michael Cheah, senior portfolio manager at AIG SunAmerica. Immediately following a big bond auction, Treasury prices typically jump up.
Earlier in the day, bond prices rallied after the New York-based Conference Board announced that its Consumer Confidence Index dropped to 50.4 from a revised 58.1 in May. The reading was the lowest since February 1992, when it was 47.3.
"The bond market is trading against the stock market," said Cheah. "At first, yes, the stock market dropped and bond prices traded up," after the consumer confidence number was released.
On Monday, Treasury prices were mixed as investors looked toward the two-day Federal Reserve meeting on interest rates. The central bank is expected to keep rates unchanged when it announces its decision Wednesday.
The Fed has cut rates seven times since September in an effort to bolster the lagging economy. The cuts have raised concerns about inflation, but supported the bond market.
When consumers spend less money, businesses suffer, and the stock market also suffers, explained Cheah. If the economy weakens, the Federal Reserve will be less inclined to raise interest rates. "The way for the bond market to do well is to expect the Fed to cut rates," he said.
If consumers don't spend and businesses suffer, another effect is that investors look for other places to put their cash, said Cheah. "If the economy is doing really badly, then the Fed cuts rates and you could even make money in the bond market," he said, motivating investors to put their assets in Treasurys. 
