US Treasury’s backpedal sends 30-year bond reeling

NEW YORK - Longer-dated Treasury debt plummeted on Wednesday after the government startled investors by saying it was considering resuming issuance of 30-year bonds. 

Regular sales of the long bond were suspended in 2001, so news of its possible reintroduction sent traders scrambling to reevaluate its fair market value. 

Thirty-year debt prices US30YTRR dived 1-25/32 for a yield of 4.59 per cent, down from a session high of 4.68 per cent but up sharply from 4.49 per cent at Tuesday's close. 

Benchmark 10-year Treasury notes US10YTRR also took a hit, albeit more moderate, as traders scrambled to unwind popular recent bets that short-term yields would rise more quickly than longer-dated ones. 

Known as curve-flattening trades, such bets were rendered untenable by news that fresh longer-dated supply might be on its way. 

"It's a complete shock," said Sadakichi Robbins, head of global fixed-income at Julius Baer in New York. "An awful lot of people have been playing curve trades and this is going to cause them a lot of pain." 

Ten-year notes dropped 5/32 for a yield of 4.19 per cent, up from 4.17 per cent. Short-term debt was largely unaffected, with two-year notes US2YTRR gaining 1/32 to yield 3.63 per cent, down from 3.64 per cent on Tuesday. 

The discrepancy helped steepen the yield curve, with the spread between 10- and 2-year debt widening to 56 basis points from 52. The differential between 30- and two-year debt grew even more dramatically, to 96 basis points from 84 on Tuesday. 

The initial jolt notwithstanding, many in the market agreed the move was necessary, given the government's ballooning budget deficits. 

They also said they believed issuing the longer-dated security would help cushion risks associated with the large number of bonds maturing in coming years. 

In its quarterly refunding announcement on Wednesday, the Treasury also said it will sell US$51 billion in securities in auctions next week. 

It said it will sell US$22 billion of three-year notes on Tuesday, US$15 billion of five-year notes on Wednesday, and US$14 billion of 10-year notes on Thursday. 

The brouhaha over the long-bond largely obscured Wednesday's batch of economic data. 

The Institute for Supply Management said its non-manufacturing index slipped to 61.7 in April, close to Wall Street forecasts but down from 63.1 in March. The index remains well above the 50 level separating growth from contraction. 

But in a bad omen for Friday's US payrolls report, the survey's jobs component fell to 53.3 from 57.1.

"The data should be regarded as consistent with some softening in the economy, with the services sector catching on to the slowing that has been more evident in the manufacturing sector," said Alan Ruskin, research director at 4CAST Ltd.  

Separate reports showed housing remains strong, with weekly mortgage applications higher and more Americans able to buy a home in recent months.  

- REUTERS