Treasurys ease amid supply influx

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NEW YORK (CNNMoney.com) -- U.S. Treasury prices eased Wednesday as a major influx of supply vied with continued demand from investors looking for a safe investment amid the dour economic climate.

The decline comes as the Treasury Department auctions off $32 billion of 5-year notes, part of a record $94 billion debt offering over three days.

On Tuesday, the market absorbed $40 billion in 2-year notes; Thursday brings another $22 billion in 7-year notes.

The Treasury's auctions are part of the government's plan to issue between $2.7 trillion and $4.2 trillion of debt over the next two years to finance its economic and financial rescue plans. The government is set to pay $787 billion for stimulus, $700 billion for the bank bailout and trillions more in various liquidity programs.

While Wednesday's auction of 5-year notes received healthy interest from the market, most investors are interested in shorter term Treasurys, according to Bill Larkin, a fixed-income analyst at Cabot Money Management.

"The market is concerned about inflation risk and supply," Larkin said. "The shorter you are, the better off."

Short-term Treasury bonds are considered more liquid and less sensitive to inflation. Rising prices erode the value of fixed-income assets.

At the same time, as the government floods the market with supply, it becomes harder for investors to sell their bonds for a profit.

"You could realize a loss if the equilibrium of supply and demand in the market falls out of balance," Larkin said.

Meanwhile, stocks recovered from earlier losses to trade higher Wednesday afternoon as investors looked past a grim report on the housing market to focus on new details regarding the government's plan to assess the health of major banks.

Prices for ultra-safe Treasury bonds often fall when stock prices rise as investors seek out higher returns on more risky assets. However, Treasury prices remained under pressure despite the rebound in stocks.

Bonds mostly fell Tuesday, despite the successful auction, as stocks bounced back from 12-year lows. Federal Reserve Chairman Ben Bernanke's testimony before the Senate Banking Committee sparked the rally, as he downplayed fears that the government was considering taking over struggling banks.

Bernanke also said the Fed is still considering buying up long-term Treasurys, helping the 30-year note rise Tuesday when most other issues fell. The Fed chief is set to repeat his economic testimony before the House Financial Services Committee on Wednesday morning.

Wednesday bond prices: The 5-year note was down 20/32 to 98-24/32, and yielded 2.01%.

The 2-year note edged down 6/32 to 99-19/32 and its yield rose to 1.08%, higher than the 0.96% awarded at Tuesday's auction. Bond prices and yields move in opposite directions.

The price of the 10-year note fell 1-9/32 to 98-9/32 and its yield was 2.95%, up from 2.8% on Monday.

The 30-year bond was down 1-26/32 at 98-7/32, and its yield held even at 3.59%.

The yield on the 3-month note stood at 0.3%, even with Tuesday's level. Demand for the shorter-term note is seen as a gauge of investor confidence.

Lending rates: The 3-month Libor rate rose to 1.26% from 1.25% on Tuesday, and the overnight Libor rate held even at 0.27%, according to Bloomberg.com.

Libor, the London Interbank Offered Rate, is a daily average of rates that 16 banks charge each other to lend money in London.

Two credit market gauges were mixed. The TED spread rose to 0.97 percentage point, up slightly from 0.95 on Tuesday. The larger the TED spread, the less willing investors are to take risks.

The Libor-OIS spread sank to 1.02 percentage points, down from 1.03 points. The smaller the spread, the more cash is available for banks to lend.