BOND REPORT: Treasurys Dragged Down By Upcoming Supply, Rival Corporate Bonds

By Deborah Levine

Treasurys declined Thursday, pushing rates up for a second day, before the government is expected to announce a record $97 billion in short-term debt hitting the market next week and as new corporate debt deals lured bond buyers.

Ten-year note yields (UST10Y) rose 10 basis points to 2.86%. A basis point is 0.01%.

Two-year note yields (UST2YR) increased 2 basis points to 0.98%, after passing 1% earlier.

The Treasury Department will make its announcement at 11 a.m. Eastern time.

Wrightson ICAP, a research firm specializing in government finance, predicts the government will sell $41 billion in two-year notes on Tuesday and $31 billion in five-year notes (UST5YR) on Wednesday, both record amounts.

It expects the seven-year note sale the following day, the first since 1993, will total $25 billion.

The rising debt sales have come as the government finances multiple programs to stabilize financial markets as well as the latest economic stimulus package. Bond yields tend to rise when supply increases because investors demand a higher return to take on additional debt.

At the same time, Treasurys are getting stiff competition from a slew of corporate bond deals that offer investors higher yields than government debt.

On Wednesday, companies sold $29.55 billion in new debt, the busiest issuance day on record, according to Informa Global Markets, which has been tracking issuance for 15 years.

That includes $16 billion in bonds from Roche Holdings (RHHBY), more than many analysts had anticipated and the largest deal ever, analysts at Informa said.

Housing finance giant Freddie Mac (FRE) also priced $10 billion in three-year notes.

"Good reception for the plethora of Wednesday's U.S. corporate and agency new issues also weighed, as it signals the wavering of the flight-to-safety trade," said Roseanne Briggen, a Treasury market analyst at Informa.

Treasurys stayed lower earlier after government reports showed the trend in claims for unemployment benefits indicated the job market weakened this month.

A separate report said wholesale prices increased more than expected in January.

A survey from the Federal Reserve Bank of Philadelphia showed manufacturing in that region continued to deteriorate this month. The index fell to -41.3 in February, the lowest in 18 years, from -24.3 last month. Readings below zero show that more manufacturing firms reported worsening conditions than reported improvements.