Treasurys sink on supply, stock rally
Demand for government bonds wanes as stocks post the biggest gain of 2009. Treasury reports healthy demand for first of three auctions this week.
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NEW YORK (CNNMoney.com) -- Treasury prices slumped Tuesday, as stocks rallied and investors responded to yet another large government debt auction.
The Treasury Department said it received healthy demand for the record $34 billion in 3-year notes it auctioned Tuesday.
It was the first of three auctions scheduled this week. The government will auction $18 billion in 10-year notes on Wednesday and $11 billion in 30-year notes on Thursday.
"There has been some concern as to who is going to keep stepping in and buying at these prices," said Kevin Giddis, managing director of fixed-income at Morgan Keegan.
While Tuesday's auction was well received, which would normally support Treasurys, a big rally on Wall Street kept downward pressure on prices.
Stocks soared in afternoon trade, with the Dow and S&P 500 bouncing off 12-year lows, as investors cheered news that Citigroup (C, Fortune 500) turned a profit in the first two months of the year.
"With stocks up 200 points, there's probably some asset allocation out of bonds in to stocks," he added.
The Dow ended the session 379 points, or 5.8% higher.
Prices for U.S. Treasury bonds, which are considered one of the safest assets available, often fall when stock prices rise as investors seek higher returns in more risky assets.
Supply: Bonds typically trade in a tight range prior to an auction, as investors wait to see how much support the auction will muster. Auctions that garner a large amount of open interest usually send bond prices higher, but bonds often fall if supply outweighs demand.
So far this year, the government has been successful in its auctions, notably selling a record $93 billion in debt in mid-February, with many more interested buyers than available debt. Some experts worry, however, that investor demand will eventually trail off, as Treasury continues its record auction campaign.
Analysts said Wednesday's auction of 10-year notes, the most widely traded Treasury bond, will give the market a better read on demand for U.S. debt.
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.
Bernanke: Investors are also responding to comments from Federal Reserve chairman Ben Bernanke.
Bernanke reiterated that stabilizing the financial system is critical to recovery in the overall economy during a speech to the Council on Foreign Relations in Washington.
He also proposed a number of regulatory reforms aimed at improving the financial system's ability to withstand a crisis in the future.
But Giddis said bondholders are responding to the Bernanke's remark that he is more concerned about inflation than deflation.
As the recession drags on, many economists have warned that deflation, the combination of falling prices and conservative consumer sentiment, poses a serious risk to the economy.
Bernanke's emphasis on inflation, however, raised alarm bells in the bond market since rising prices can severely erode the value of fixed-income assets. Longer term Treasurys are particularly inflation-averse.
"Inflation is like kryptonite for the 30-year," Giddis said.
Bond prices: The benchmark 10-year note sank 1 9/32 to 97 26/32, and its yield rose to 3.01% from 2.86% late Monday. Bond prices and yields move in opposite directions.
The 30-year bond plunged 2 27/32 to 95 31/32 and yielded 3.73%, up from 3.56%.
The 2-year note fell 5/32 to 99 22/32, and yielded 1.04%, up from 0.96%.
The 3-month bill yielded 0.23%.
Lending rates: The 3-month Libor rate rose to 1.33% from 1.31% on Monday, according to data on Bloomberg.com. The overnight Libor rate held steady at 0.33%.
Libor, the London Interbank Offered Rate, is a daily average of rates that 16 different banks charge each other to lend money in London.
One credit market gauge was unchanged and another showed decreased confidence in the credit markets. The "TED" spread held steady at 1.10 percentage point, unchanged from Monday. The bigger the TED spread, the less willing investors are to take risks.
The Libor-OIS spread widened to 1.07 percentage points from 1.05 percentage points Monday. The wider the spread, the less cash is available for lending. 
