Bond prices shrug off record refunding

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NEW YORK (CNNMoney.com) -- Government debt prices edged lower Wednesday as investors shrugged off the announcement of a record quarterly refunding of longer-term debt.

The Treasury market has seen a record volume of supply come to market in recent months as the government looks to fund its various stimulus programs.

Typically, an announcement about more supply would push prices lower. With record volume already hitting the market recently, news of the refunding had little impact.

The government's announcement "reflects the huge borrowing needs through this year and next year and maybe a couple of years to come," said Kim Rupert, fixed income analyst at Action Economics. "But these are not surprising numbers that we saw today in light of the current situation."

A rock and a hard place: The Treasury announced that it would be offering a record $67 billion of long-term securities in the quarter, to refund $36.3 billion of securities that are maturing and to raise another $30.7 billion.

The refunding announcement includes a new monthly offering of a 7-year note. Also, the Treasury said it would be bringing $32 billion worth of 3-year notes to market, $21 billion in 10-year notes and $14 billion in a new 30-year bond. The Treasury also announced a regular reopening of the quarterly 30-year bond starting in March.

The refunding announced Wednesday is in addition to regularly scheduled debt sales. The Treasury warned that it expects to reach the debt ceiling in the first half of 2009.

If that happens, Treasury would not be able to issue more debt and Congress would likely be forced to raise the debt ceiling.

The Treasury Borrowing Advisory Committee, a financial services industry advisory group, warned in its quarterly report that the government needs to do a lot of borrowing in the near future. It cites a rapid decline in tax receipts due to unemployment, falling profits and the decline in stock prices, as well as the surge in government spending to pull the nation out of the recession.

"There is near consensus that Treasury's funding needs during the next two years will be the largest in the post-war era in dollar terms, and likely also as a percent of GDP," the committee said in a letter to Treasury Secretary Timothy Geithner. The group estimated that in fiscal years 2009 and 2010, the total supply of Treasurys brought to market will likely surpass $3 trillion and could possibly touch $4 trillion.

Dour labor market: Jobs have been slashed by the thousands on a daily basis in recent weeks. Mounting job losses have investors fearing that the recession - which is more than a year old - could be firmly entrenched for a while longer. Investors tend to move assets to government bonds as a safe haven during times of uncertainty.

The number of planned job cuts in January rose to a 7-year high, according to a report released Wednesday by outplacement firm Challenger, Gray & Christmas Inc. Job cut announcements by U.S. employers jumped to 241,749 in January, up 45% from December's 166,348 cuts. And payroll company ADP reported that private sector jobs decreased by 522,000 in January.

The report set investors on edge ahead of the government's monthly unemployment report, due out Friday. The Labor Department report is expected to report that the unemployment rate jumped to 7.5% in January from 7.2% the month prior, according to a consensus estimate of economists complied by Briefing.com. The number of jobs lost in the month was forecast to be 500,000.

Debt prices: The benchmark 10-year note fell 10/32 to 107 1//32 and its yield rose to 2.92%. Government bond prices and yields move in opposite directions.

The 30-year bond rose 10/32 to 115 and its yield fell to 3.66%. The 2-year note ticked down less than 1/32 to 99-26/32 and its yield rose to 0.99%.

The yield on the 3-month Treasury bill was 0.30%. The 3-month bill has been used as a short-term gauge of confidence in the marketplace, because investors tend to shuffle funds in and out of the bill as they assess risk in other places - the lower the yield, the more risk they see.

Lending rates: The 3-month Libor rate rose to 1.24% Wednesday from 1.23% the day before, according to data made available on Bloomberg.com. Meanwhile, the overnight Libor rate fell to 0.25% from 0.31%.

Libor, the London Interbank Offered Rate, is a daily average of rates that 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 showed slightly less confidence in the market. The "TED" spread widened to 0.94 percentage point Wednesday from 0.89 percentage point Tuesday. The bigger the TED spread, the less willing investors are to take risks. The rate surged as the credit crisis gripped the economy, but it has since fallen off as central banks around the world have lowered interest rates and pumped liquidity into the economy.

Another market indicator, the Libor-OIS spread, ticked up to 0.99 percentage point Wednesday from 0.98 percentage point the day before. 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.