Treasurys fall after auction
Prices for U.S. debt decline after the government sells $34 billion in 5-year notes.
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NEW YORK (CNNMoney.com) -- Treasury prices fell Wednesday after another big auction raised concerns that the supply of U.S. debt securities could outweigh demand.
The Treasury Department sold $34 billion in 5-year notes in the second of three auctions this week aimed at selling a record $89 billion in debt.
The retreat came even as the Federal Reserve purchased $7.5 billion in Treasurys as part of its plan to buy $300 billion in longer term issues.
Stocks rallied throughout the morning, undermining demand for Treasurys as a safe haven, as investors welcomed better-than-expected readings on new home sales and durable goods orders in February. The major indexes turned lower in afternoon trade before pulling out modest gains at the end of the session.
Meanwhile, the U.K. government failed to draw sufficient demand for an auction of 40-year gilts, fueling concerns about waning demand government debt.
"Between the gains in equities, the failed U.K. auction and a record 5-year offering, it seems that there's a little more selling than buying today," said Kim Rupert, fixed-income analyst at Action Economics.
Supply: Wednesday's auction of 5-year notes drew more than $68 billion worth of bids, for a bid-to-cover ratio of 2.02. That's down from the previous month's auction, which received a more robust 2.21 bid-to-cover ratio, suggesting that demand is weakening.
On Tuesday, however, the Treasury received stronger-than-expected demand for its $40 billion issuance of 2-year notes.
The Treasury will offer $24 billion in 7-year notes on Thursday, bringing the total for the week to a record $89 billion. The government sold $63 billion in U.S. debt in the week ended March 14.
The auctions come as the government seeks billions to fund its myriad economic rescue plans. So far this year, the auctions have met with healthy support from domestic and foreign investors, but many analysts worry that demand will soften as the government floods the market with supply.
"There are some early indication that supply is starting to hurt a bit," Rupert said. "The concern is that demand wont be as firm in the future."
Supply worries were highlighted after an auction of U.K. government bonds, or gilts, failed to draw sufficient support.
According to the British newspaper The Telegraph, the U.K. Debt Management Office attracted just £1.67 billion in bids for its sale of £1.75 billion of 40-year gilts Wednesday. That marked its first uncovered auction of conventional gilts since 1995.
Earlier in the month, Chinese Premier Wen Jiabao said he had "some worries" about the safety of U.S. debt. China's central bank chief expressed support Monday for an alternative reserve currency to challenge the dollar.
China holds massive amounts of U.S. debt, and analysts say the rhetoric belies the country's concern about the stability of its holdings as the U.S. economy weakens.
Fed: The Federal Reserve kicked off its campaign to buy $300 billion in longer- term Treasury bonds with a $7.5 billion purchase operation.
The Fed purchased notes that mature from February 2016 to February 2019. The central bank said nearly $22 billion was submitted in response to the operation.
By purchasing long-term Treasurys, the Fed hopes to drive down interest rates on consumer and business loans and help ease the flow of credit. In addition to buying government debt, the Fed plans to buy another $750 billion in mortgage-backed securities.
Starting April 1, the New York Fed will release a tentative operation schedule every two weeks. It expects to hold 2 to 3 operations per week over the next six months.
"The operation helped boost Treasurys off their lows, but it was fairly minimal," Rupert said.
Bond prices: The benchmark 10-year note was down 24/32 at 99 22/32 and its yield rose to 2.79% from 2.7% late Tuesday. Bonds and yields move in opposite directions.
The 30-year bond fell 1 21/32 to 95 25/32 with a yield of 3.74%, up from 3.64%.
The 2-year note was down 3/32 to 99 27/32, and yielded 0.96%, up from 0.92%.
The 3-month yield rose to 0.19%.
Lending rates: The 3-month Libor rate was unchanged from Tuesday at 1.23%. It stood at 1.22% on Monday, according to data on Bloomberg.com. The overnight Libor rate also held steady at 0.29%.
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 reflected decreasing confidence in the market place, another showed relatively unchanged conditions. The "TED" spread widened slightly to 1.04 percentage points from 1.01 percentage points Tuesday. The narrower the TED spread, the more willing investors are to take risks.
The Libor-OIS spread was unchanged from 0.99 percentage point Tuesday. A narrower spread indicates that more cash is available for lending. 
