Treasurys fall as record auction starts

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NEW YORK (CNNMoney.com) -- Treasurys fell Monday after the government kicked off a record weekly offering of $123 billion in U.S. debt.

In the first of four auctions to be held this week, the U.S. sold $7 billion worth of reopened 5-year Treasury Inflation Protected Securities, or TIPS.

TIPS are designed to provide a hedge against future inflation. The principal on these securities is adjusted in line with the consumer price index, allowing the assets to maintain value as prices rise.

Monday's auction drew healthy demand. Investors submitted more than $21 billion in bids for the $7 billion worth of TIPS sold. The bid-to-cover ratio, a measure of demand, was 3.1. That compares with 2.66 at the last auction of 5-year TIPS in April.

Indirect bidders, a category that includes foreign central banks, bought 46% of the assets sold.

Supply onslaught. On Tuesday, the government will offer $44 billion worth of 2-year notes, followed by $41 billion in 5-year notes on Wednesday and $31 billion in 7-year notes on Thursday.

Steve Van Order, a fixed income strategist at Calvert Funds, said the 5- and 7-year auctions will be the week's "main event."

"The market is continuing to set up for all the supply this week and there's no economic data today to provide direction," he said.

This week's offerings are the latest in a string of record debt sales the government has held this year to help fund its economic stimulus efforts and service a growing budget deficit.

While demand for U.S. debt has been relatively strong at recent auctions, many traders say the constant supply of new issues could eventually drive prices lower, potentially hindering the government's ability to finance its operations.

Bond prices have typically fallen ahead of big auctions this year, though the market can be volatile during the week in which the large amounts of debt are being sold.

No major economic reports were released Monday. The market is gearing up for Thursday's report on U.S. gross domestic product -- the broadest gauge of the health of the economy.

Economists surveyed by Briefing.com expect GDP to have grown at an annual rate of 3.2% in the third quarter after shrinking 0.7% in the second quarter.

Fed's final buy. The Federal Reserve will purchase Treasurys maturing in December 2013 and April 2016 on Thursday in the final phase of its plan to buy $300 billion worth of U.S. debt.

The Fed began buying Treasurys in March in an effort to keep interest rates lower and spur economic recovery. However, as economic conditions have improved, especially in the housing market, the Fed opted to let the program wind down on schedule.

Van Order said he expects the market to be unfazed by the Fed's absence. "It's strange to say this about $300 billion, but it wasn't really a material amount compared to the amount of supply," he said.

Bond prices. The benchmark 10-year note was down 19/32 to 100-17/32 and its yield rose to 3.55% from 3.47% late Friday. Bond prices and yields move in opposite directions.

The 2-year note edged down 1/32 to 99-30/32 with a yield of 1.02%.

The 30-year bond retreated 1-10/32 to 102 5/32. Its yield was 4.36%.

The yield on the 3-month bill was 0.06%.