BOND REPORT: Treasurys Down Before Debt Auctions Begin

By Deborah Levine

Treasurys declined Tuesday, pushing yields up, before the government sells the first part of $98 billion in note auctions this week.

Two-year note yields (UST2YR) increased 2 basis points, or 0.02%, to 0.92%.

Benchmark 10-year yields (UST10Y) rose 7 basis points to 2.72%. Bond yields move inversely to prices.

The Treasury will accept bids on $40 billion in the securities until 1 p.m. Eastern. The amount matches a record-high set last month.

Traders and investors often sell existing holdings in order to buy to the more liquid, newest securities.

It will sell a record $34 billion in 5-year notes (UST5YR) on Wednesday. On Thursday, it will auction $24 billion in 7-year notes, only the second sale of the maturity in more than a decade. Both amounts are $2 billion more than at the last sale.

"The prospect of three large Treasury auctions puts us in the inevitable 'let supply wreak its havoc' mode," said strategists at RBS Greenwich Capital.

These will be the first auctions since the Federal Reserve last week said it would buy up to $300 billion in Treasury securities, with a focus that includes these maturities, over the next six month. Its purchases are expected to be made from the market, not directly at the auction, but analysts note the central bank is likely to be most interested in the newest issues, since they serve as benchmarks for rates on other forms of debt, including corporate, mortgage and consumer lending.

Doing that would also relieve pressure on the government's 16 primary dealers that have to bid at auctions of ever-increasing amount of debt to finance all of the economic stimulus and programs to fix the financial markets.

"An informal Fed backstop for the auction process would remove some of the underwriting risk for dealers and might result in lower market yields," said analysts at Wrightson ICAP, a research firm specializing in government finance. "Unfortunately, the Fed may not be ready to commit itself to a specific framework for Treasury purchases as early as today."

Last Wednesday, the Fed said in a statement it would begin purchases late in the week.

Though less material for the broader bond market, the government will also issue $35 billion in 4-week bills (UST1MO) Tuesday.

Also on tap Tuesday, Federal Reserve Chairman Ben Bernanke and Treasury Secretary Timothy Geithner will be testifying to a congressional committee about the bailout of American International Group. (AIG).