Bonds dip under new debt sales
The market weighs a week of heavy issuance with uncertainty over economic stimulus plans.
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| Click on the chart to see other government bond prices and yields. |
NEW YORK (CNNMoney.com) -- Government debt prices drooped Monday at the start of a week of large new debt sales, and as investors wait for further clarity on the economic stimulus plan.
"The underlying factor is supply, this looming Treasury deficit," said Pierre Ellis, senior economist at Decision Economics. The deficit was projected to top $1.2 trillion in fiscal 2009, and the government is still ramping up its spending initiatives.
Debt prices have mostly fallen in 2009, pulling yields off record lows hit in December, as the market focused on the record volume of debt hitting the market. Bond prices and yields move in opposite directions.
"In general, there has been strong global demand for Treasurys because they are a safe haven, but at some point that becomes less certain as the world looks at the supply that is coming and the potential stabilization of the world economy," said Ellis. The concern is whether demand can keep pace with the supply as debt prices fall.
Billions of dollars in new debt are due to be sold this this week.
The Treasury was set to auction off $31 billion of 13-week notes and $30 billion in 26-week notes Monday. On Tuesday, $23 billion of 52-week bills go on the chopping block, along with $32 billion of 3-year notes. On Wednesday, the government auctions $21 billion of the 10-year note and $14 billion worth of 30-year bonds will be sold Thursday.
Stimulus jitters: The Senate is scheduled to vote Tuesday on its version of the stimulus plan requested by President Obama. If that passes, the Senate must reconcile its version with one passed by the House late last month. While there are still a lot of details to be negotiated, one certainty is that it will be expensive.
"The stimulus plan is going back and forth, but eventually something will pass and it will be large, and that is (resulting in more) supply," said Ellis. "And then the issue is whether it will help the economy or not."
If the government achieves its goal of resuscitating the economy with the stimulus package, the Treasury market could suffer from a lack of demand - driving prices down and yields up.
"Then you worry about the Treasury market because that supply will be coming in the face of an economy that will be improving a little bit," said Ellis.
In addition to Obama's stimulus, investors were waiting for more details about the bank bailout. Treasury Secretary Timothy Geithner pushed back his speech detailing how the government will spend the remaining $350 billion set aside to bail out the financial sector. The plan will be announced Tuesday, one day later than originally announced.
Debt prices: Government bond prices fell, although they climbed slightly off early session lows as the stock market stumbled amid investor anxiety about the timeline of the stimulus bill.
The benchmark 10-year note edged down 16/32 to 105-31/32 and its yield rose to 3.04% from 2.99% late Friday.
The 30-year bond fell 23/32 to 113-19/32 and its yield rose to 3.75% from 3.69% Friday. The last time bond ended the day with a yield above 3.70% was Nov. 24. when it finished at 3.78%.
The 2-year note dipped 3/32 to 99-22/32 and its yield rose to 1.05% from 0.99% late Friday.
The yield on the 3-month note rallied to 0.29% from 0.28% Friday. The 3-month is a short-term gauge of confidence in the marketplace, because investors shuffle funds in and out of the bill as they assess risk in other places.
Lending rates: Bank-to-bank lending rates were largely unchanged. The 3-month Libor rate dipped to 1.23% from 1.24% Friday, according to data on Bloomberg.com. The overnight Libor rate, meanwhile, was unchanged from Friday at 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.
Two credit market gauges showed increased confidence in the marketplace. The "TED" spread narrowed to 0.94 percentage point from 0.97 percentage point the day before. The bigger the TED spread, the less willing investors are to take risks.
Another market indicator, the Libor-OIS spread, narrowed to 0.96 percentage point from 0.97 percentage point the day earlier. The narrower the spread, the more cash is available for lending. 
