Stock market sell off blamed on 10 year auction

Treasury Holds 'Awful' Auction: 10-Year Yield Hits 3.99%

US Treasury prices fell on Wednesday, sending benchmark yields to eight-month highs, after an auction of 10-year notes heightened concerns about the cost of financing the burgeoning U.S. budget deficit.

It was the first test of the government's long-term borrowing ability since investors began to wonder last month whether the United States' prized AAA credit rating may be living on borrowed time.

By some measures the auction went well, with high demand overall and a proxy for foreign interest, the indirect bidding, very robust, especially for the reopening of a previously issued security.

The main downside was that the high yield at the auction was above market expectations. This "tail," as it is known in the market, showed investors wanted the government to pay a premium to get the bonds sold and tipped the balance for a negative interpretation of the sale.

The Treasury said it sold $19 billion in 10-year notes at a high yield of 3.99 percent, the highest of the year.

That yield was higher than where the when-issued note was trading prior to the auction, suggesting that the Treasury Department had to offer a concession to buyers.

"Auction awful," said Andrew Brenner, senior vice president of MF Global in New York.

The bid-to-cover ratio was 2.62, better than the average bid-to-cover ratio of the last six re-openings of 10-year notes, which was 2.42, suggesting that the Treasury Department had to offer a concession to buyers.

"The auction was weak. It wasn't shocking," said John Spinello, chief fixed-income technical strategist at Jeffries. "There's some negative psychology. It is trading underwater right now."

The results run somewhat counter to recent auctions, though investors have been fairly consistent about which end of the yield curve they favor.


Longer-dated Treasurys have languished amid fears that inflation could creep into the marketplace in the coming years, due to large issuance of government debt to pay for stimulus and bailout programs.

Shorter-dated Treasurys are more popular because investors fear that they could lose money in real terms over the long haul if the rate inflation exceeds bond yields.

The weak auction put pressure on both stocks and bonds.

The Dow Jones industrial average fell more than 70 points. The government had to lure buyers with a higher yield than the market anticipated.

Investors are concerned the government's debt load will become untenable, leading to higher inflation and soaring interest rates. Rising rates could hamper the economy's recovery.


I LIKE THE BOND MARKET HERE. IEF (10 Yr Bonds) 88.03 -.49