Bonds fall after record auction

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NEW YORK (CNNMoney.com) -- Government bonds continued a three-day slide Tuesday, after the Treasury Department auctioned off another $28 billion in debt.

Treasury sold 5-year notes in record amounts to investors. Despite a strong showing at the auction, the session was thinly traded with many traders on holiday vacation. This week's light trading put last week's bond rally on hiatus, when yields sunk to record lows.

Tuesday's auction follows Monday's $92 billion in auctions, which included a record $38 billion in 2-year notes and a combined $54 billion in 3-month and 6-month bills.

The $110 billion of auctions in the past two days comes 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.

Despite a record issuance of government debt, investors continue to stockpile government bonds in their portfolios and corporate balance sheets. With the stock and commodities markets plunging this year, investors have placed their funds in Treasurys with the hope that government bonds will provide a safe investment.

As a result, Treasury bonds have performed very well this year, returning 14.3% to investors, according to a Lehman Brothers index. Investors holding S&P 500-based index funds have lost 41% of their investment so far in 2008.

Bond prices have continued to rise despite ultra-low yields. The 5-year bond yielded just 1.54% in Tuesday's auction, a record low.

Bonds fall: The 10-year note was unchanged at 114-1/32, and its yield held at 2.17% from Monday. Bond prices and yields move in opposite directions.

The 30-year long bond dropped 24/32 to 137-23/32, and yielded 2.65%, up from 2.59%.

The 2-year note fell 16/32 to 99-30/32, and its yield rose to 0.93% from 0.81%.

The 5-year note sank 4/32 to 102-20/32, and yielded 1.46%/

The yield on the 3-month note fell to 0.015% from 0.02%, 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 rose to 0.12% from 0.11% from Monday, and the 3-month Libor rate held steady at 1.47%, 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 slightly lower.

The "TED spread" rose to 1.46 percentage points from 1.45 percentage points. 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, rose to 1.25 percentage points from 1.24 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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