Bonds fall after $92B in auctions
Record Treasury auctions send government bond prices lower, even as demand remains high.
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NEW YORK (CNNMoney.com) -- Government bonds fell Monday for the second straight session after the Treasury Department auctioned off $92 billion in debt.
Treasury sold a record $38 billion in an auction of 2-year notes and a combined $54 billion in 3-month and 6-month bills as the government attempts to finance its ever-growing debt. The Treasury last week promised $13.4 billion to the U.S. auto industry, using up the last of the first $350 billion Congress allotted to rescue the financial markets.
Growing supply continues to meet high investor demand for government bonds. With the stock and commodities markets plunging this year, investors have placed their funds in Treasurys with the hope that the securities will serve as a safe-haven investment. As a result, bonds have performed very well this year, despite a volatile economy and financial markets.
"There continues to be good demand for Treasurys," said Andrew Brenner, senior vice president at MF Global. "That will continue until at least after the first quarter of 2009, when we start to see sustained improvement in the stock market and in the economy."
As a result, the auctions were met with high interest, even with another $28 billion to be auctioned in 5-year debt on Tuesday. Bond investors didn't seem to mind ultra-low yields, with the 3-month bill yielding less than 0.01% in the auction. The 2-year bill had a median yield of just 0.83% in the auction, the first time it registered a yield below 1% since the Treasury began keeping records in 1976.
"This may be the first auction since the Eisenhower administration with a coupon below 1%," Brenner said. "Still, the auction gained a reasonable level of support."
Bonds fell slightly Monday, as they were lightly traded with many traders on holiday vacation. Such light trading may continue through the rest of the year, which means bonds may show only slight movements - regardless of the size or success of future auctions - until January.
"This is typically a very slow time of the year, and volumes are off dramatically today, running 30% below normal," Brenner said. "That means there's not a lot of people to put the money to work."
Bonds fall: The 10-year note dipped 3/32 to 114-11/32, and its yield rose to 2.14% from 2.13% from Friday. Bond prices and yields move in opposite directions.
The 30-year long bond dropped 1-3/32 to 139-6/32, and yielded 2.59%, up from 2.56%.
The 2-year note fell 4/32 to 100-28/32, and its yield rose to 0.81% from 0.75%.
The yield on the 3-month note fell to 0.02% from 0.03%, and has been hovering around 0% for more than a week. Yields near the zero mark on short-term bills are an indication that investors are completely risk-averse, prioritizing safety above profit.
Lending rates remain low: Meanwhile, lending rates between banks remained near record low levels. The overnight Libor rate held steady at 0.11%, and the 3-month Libor rate fell to 1.47% from 1.5% from Friday, according to Bloomberg.com.
Libor, the London Interbank Offered Rate, is a daily average of what 16 different banks charge other banks to lend money in London, and is used to calculate adjustable-rate mortgages. More than $350 trillion in assets are tied to Libor.
Two market gauges showed confidence edging higher.
The "TED spread" narrowed to 1.45 percentage points from 1.48 percentage points Thursday. The TED spread measures the difference between the 3-month Libor and the 3-month Treasury bill, and is a key indicator of risk. The higher the spread, the more unwilling investors are to take risks.
Another indicator, the Libor-OIS spread, fell to 1.24 percentage points from 1.29 percentage points as the Overnight Index Swap rate plummeted to 0.17% from an opening level of 0.32% Tuesday.
The Libor-OIS spread measures how much cash is available for lending between banks, and is used for determining lending rates. The bigger the spread, the less cash is available for lending. 
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