"You have the Fed buyback and stocks are a little weaker," said Thomas Roth, a senior Treasuries trader at Mitsubishi UFJ Securities USA in New York. Primary dealers submitted a smaller-than-usual $4.047 billion in bonds for the US central bank to buy. The Fed's subsequent $1.837 billion purchase of Treasuries maturing February 2036 to November 2042 caused these dealers, who do business directly with the Fed, to scramble for longer-dated issues on the open market, traders and analysts said.
Even with Tuesday's moderate gains, the bond market held to its recent trading range as most investors remained sidelined before the year-end and with no obvious progress in Washington to avert a set of automatic tax increases and spending cuts that could further depress already slow US economic growth. Competition from corporate bond supply and some early preparation for next week's federal debt sales mitigated concerns about the federal budget talks, analysts said.
"When things are drifting like this, we see some money gravitating to investment-grade corporate bonds," said Jim Vogel, interest rate strategist with FTN Financial in Memphis, Tennessee. With Treasury yields deliberately kept low by the Fed, investors reach for more yield in riskier assets such as investment grade corporate debt and lower-rated high-yield bonds. Analysts expected companies to sell $25 billion in debt this week, according to IFR, a unit of Thomson Reuters.
In afternoon trading, benchmark 10-year Treasury notes were up 3/32, their yields easing less than a quarter of a basis point to 1.606 percent from 1.625 percent late on Monday. The 10-year yield has found chart support at its 100-day moving average at 1.65 percent, according to Reuters data. Wall Street stocks were narrowly lower in afternoon trading on Tuesday after opening flat.
Bond prices erased initial losses tied to news that Greece received better-than-expected terms for its debt buyback, which stoked hopes it would continue to get financial help to avoid a chaotic default and worsen the region's debt crisis. Treasuries have moved in a tight range since the US presidential election nearly a month ago. Traders are mindful of the so-called "fiscal cliff," a series of tax increases and spending cuts worth $600 billion in the new year unless the White House and Congress devise a mutually acceptable alternative.
On Tuesday, Republican leaders kicked two of the most conservative members off the House Budget Committee, which was perceived as a move to advance a deal with Democrats to cut the federal deficit. Jeff Given, portfolio manager at Manulife Asset Management in Boston, seemed disinclined to place positions based on the possible outcome of the political debate in Washington.