By Min Zeng
U.S. government bonds took a beating Tuesday, weighed down by a
flurry of new bond sales from the both the public and private
sectors.
Meanwhile, the Federal Reserve starts its two-day policy meeting
Tuesday. The central bank is scheduled to release an interest-rate
statement on Wednesday.
In recent trading, the yield on the benchmark 10-year Treasury
note was 1.975%, compared with 1.923% on Monday, according to
Tradeweb. When bond prices fall, their yields rise.
Lower bond prices attracted buyers to a $35 billion sale of
five-year Treasury notes Tuesday afternoon. Overall demand for the
auction was the highest since November.
The new five-year Treasury notes were sold at a 1.38% yield. The
indirect bidding, a measure of foreign demand, was 61.2%, higher
than the average of 59.4% for the past four auctions. It highlights
U.S. bonds' appeal in a low-yield world--by having much higher
yields than investors can get from comparable markets in Germany
and Japan.
But the bond market still faces a $29 billion sale of seven-year
Treasury notes on Wednesday.
New corporate bond supply also sent Treasury bond prices lower,
highlighting the U.S. government bond market's important role in
corporate finance. Companies typically sell Treasury bonds to hedge
against unwanted interest-rate swings when they plan a new debt
sale.
Companies are selling new bonds to lock in still-low interest
rates because once the Federal Reserve raises interest rates, their
borrowing costs may be higher. Oracle Corp. and Amgen Inc. are
among firms that plan to sell new debt on Tuesday.
The 10-year Treasury yield has been trading between 1.8% and 2%
over the past few weeks as concerns have eased that the Fed may
raise interest rates as early as June.
A number of disappointing releases in jobs growth, retail sales
and manufacturing activities have raised investors' expectations
that the Fed would remain patient. Economists polled by The Wall
Street Journal expect Wednesday's government report to show a 1%
growth rate for the U.S. economy during the first quarter of this
year, slowing down from 2.2% a quarter earlier.
Tom Tucci, head of Treasury trading in New York at CIBC World
Markets Corp., said he expects Wednesday's rate statement from the
Fed to show no rush in raising rates, which would prevent bond
yields from rising significantly. A rise in the Fed's benchmark
interest rate could shrink the value of outstanding bonds.
The Fed has held the fed-funds target rate between zero and
0.25% since December 2008, a key short-term interest rate affecting
money flowing in and out of the broader economy. The Fed hasn't
raised interest rates since 2006.
Bond buyers have benefited from a broad decline in interest
rates over the past year, driven by an uneven pace of global
economic growth and subdued inflation, which has delivered decent
capital gains. The 10-year Treasury yield was 2.173% at the end of
2014, and 3.03% at the end of 2013.
Lower bond yields in Europe and Japan, driven partly by
bond-buying monetary stimulus from the European Central Bank and
the Bank of Japan, have increased the attractiveness of
higher-yielding Treasury debt over the past year.
Analysts have cautioned that at these slim yield levels,
bondholders are vulnerable if sentiment turns sour. Even a moderate
rise in bond yields could eliminate paltry interest payments.
Write to Min Zeng at min.zeng@wsj.com