Bond prices fall amid auctions

Treasurys edge lower as the market prepares for record amount of supply. Job cuts and dour corporate earnings do little to keep bond prices from sinking too far.

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By Catherine Clifford, CNNMoney.com staff writer

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NEW YORK (CNNMoney.com) -- Government debt prices fell Monday as the market weighed a record amount of supply in the pipelines against a fresh wave of layoffs.

Even as negative news continues to dampen investor sentiment, bond prices keep dropping. Historically, a barrage of negative economic news sends investors searching for the safety of government debt. But with the government auctioning off Treasurys to fund massive stimulus programs, any buying is being overshadowed.

"I think it is supply and more supply and more supply and uncertainty over who is going to buy it all," said Mary Ann Hurley, vice president of fixed income trading at D.A. Davidson.

A combination of record deficit spending, a growing fear of inflation setting in long term, and the threat of decreased foreign demand have brought government debt prices off record highs seen toward the end of 2008.

With the deficit expected to top $1 trillion in fiscal 2009 and President Obama looking to push a new $825 billion stimulus package through Congress, debt prices have been falling in anticipation of the onslaught of Treasurys being auctioned.

"We have lots of money entering the system - lots and lots of money - because the Treasury has to issue debt to fund all of this deficit spending," said Hurley. "The $825 billion fiscal stimulus plan that is coming down the line from the Obama administration, the bank bailouts - it has to be funded in some way and it is lots and lots of money entering the system."

The Treasury was scheduled to auction $135 billion worth of debt this week, on top of the $120 billion worth of debt brought to market last week.

Monday, the government auctioned $29 billion worth of 13-week bills, $28 billion worth of 26-week bills, and $8 billion worth of 20-year TIPS (Treasury Inflation-Protected Securities). Tuesday, the government was set to auction $40 billion worth of 2-year notes and on Thursday, the Treasury was prepared to sell $30 billion worth of 5-year notes.

Additionally, the Federal Reserve has the target range for its key interest rate set at between zero percent and 0.25%. When investors are afraid of inflation, fixed income investments loose appeal.

While other countries are typically one of the largest buyers of Uncle Sam's debt, foreign demand may slacken as other countries need to spend on their own domestic issues.

Meanwhile, companies have been slashing jobs and posting massive losses as a recession grips the nation. On Monday alone, some 50,000 job cuts were announced.

The ongoing bad news on the labor front will likely keep pressure on Treasurys, said Hurley, who said the more negative news that hits the market, the more likely the government will look for additional stimulus programs. And those programs will need to be funded through Treasury auctions.

Debt prices: The 30-year longbond sank 1-8/32 to 120-4/32 and its yield rose to 3.38% from 3.3%. That's sharply different from the end of 2008, when the 30-year traded above 140 and its yield was as low as 2.53% on Dec. 18.

Bond prices and yields move in opposite direction.

The 10-year Treasury note fell 6/32 to 109-16/32 and its yield rose to 2.64% from 2.61% late Friday.

The 2-year note edged lower 1/32 to 100-3/32 and its yield rose to 0.84% from 0.8%.

Meanwhile, the yield on the 3-month note was flat with Friday at 0.10%. The 3-month bill has been used as a gauge of confidence in the marketplace because investors tend to shuffle funds in and out of the bill as they asses risk in other places.

Lending rates: The 3-month Libor rate edged higher to 1.18% from 1.17% Friday, according to data available at Bloomberg.com. The overnight Libor, however, ticked lower to 0.23% from 0.24%.

Libor, the London Interbank Offered Rate, is a daily average of rates 16 different banks charge each other to lend money in London, and it is used to calculate adjustable-rate mortgages. More than $350 billion in assets are tied to Libor.

Two credit market gauges were mixed. The so-called "TED" spread, a measure of banks' willingness to lend, ticked higher to 1.08 percentage point from 1.07 percentage points Friday. The bigger the TED spread, the less willing investors are to take risks. The rate surged as the credit crisis gripped the economy, but has since fallen off as central banks around the world have lowered interest rates and pumped the economy with liquidity.

Another market indicator, the Libor-OIS spread, widened to 0.94 percentage points from 0.92 percentage points Friday. 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. To top of page

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