After Brief Rebound, Treasurys Tripped Up by Stocks, Supply

    --$32 billion in three-year note sale due Tuesday

    --Bond bulls still see selloff as buying opportunity

    --Traders see Fed buying a cushion for much higher yields

       By Min Zeng 

    Treasury bond bulls prevailed earlier Monday but gradually ceding ground to bears, sending bond prices lower for a sixth straight session.

    Bond bulls took advantage of yields that were near 11-month highs to buy. Yet the purchases were overwhelemed by a looming $66 billion in new debt sales due over the next three days and a rise in U.S. stocks. Both factors provided an excuse for bears to push bond prices under water.

    The price swing underscores how vulnerable the Treasury bond market is at a time when anxiety over higher yields has risen. The benchmark 10-year note's yield, which moves inversely to its price, has climbed from 1.76% at the end of last year and from a record low of 1.38% set in July.

    "The fear of rising yields continues to grow, but we have seen this story several times in the past and many investors have been forced to take heavy losses" waging negative bets on the bond market, said Jason Rogan, managing director of U.S. government bond trading at Guggenheim Partners in New York.

    "I think customers are a little more patient this time around and are willing to miss the beginning of the move to feel more secure about" betting on Treasury bond yields to rise for the long term, he added.

    The benchmark 10-year note fell 1/32 in price in late-afternoon trade, yielding 2.058%, according to Tradeweb.

    The safe-harbor market sold off last week as U.S. economic releases including Friday's bigger-than-forecast employment growth brightened sentiment over the growth outlook. The 10-year yield hit 2.086% during Friday's trading, the highest since April 2012, and rose by 0.20 percentage point last week.

    For the moment, bond bulls still see any selloff as a buying opportunity as they remain skeptical whether the global growth will gain traction in coming months. There are also some concerns whether the bull run in the U.S. stock market--the Dow Jones Industrial Average hit all-time highs last week--may suffer a selloff, a scenario that boosts the allure of Treasury bonds as a hedge.

    Bond bulls found some supporting evidence Monday from disappointing industrial productions and retail sales reports out of China. Also, in Italy, political gridlock remained, hampering the formation of a new government. The nation's sovereign credit rating was downgraded by Fitch on Friday, which pushed down Italy's government bond prices Monday.

    "There is definitely a bit of bargain hunting going on," said Anthony Cronin, a Treasury bond trader at Societe Generale SA in London. "There are obviously still some concerns out there such as the Italian elections and escalations (of tensions) in Korea, which are casting a shadow over the strength of the economic news."

    Bond prices would deepen losses as supply pressure mounts. A $32 billion sale of three-year notes is due Tuesday afternoon, followed by $21 billion in 10-year notes Wednesday and $13 billion in 30-year bonds Thursday.

    Some traders warn that a break of 2.08%-2.10% will set up the 10-year note's yield for a rise to 2.25% and the selling could be reinforced as it feeds into growing worries over further rise in yields.

    Some others doubt the rise would be sustainable as the Federal Reserve remains a key buyer. The Fed's steady purchases of Treasury bonds, part of its unconventional monetary stimulus for the economy, not only bolstered equities but also helped temper the rise in bond yields, a key reason why bond bulls were encouraged to buy Treasury bonds on any selloff.

    Tom Tucci, managing director and head of Treasury trading at CIBC World Markets Corp. in New York, argues that "the Fed needs multiple months of higher employment reports and multiple quarters of sustained [economic] growth before they consider a change in policy."

    Fed Chairman Ben Bernanke and Vice Chairman Janet Yellen have signaled in recent weeks that the Fed will maintain its bond-buying program as long as the jobless rate is still above the 6.5% threshold the central bank set as a guidance to remove monetary stimulus.

    Mr. Bernanke has warned that much higher Treasury yields may derail the economic recovery since they will push up long-term borrowing costs such as mortgages.

    U.S. Swap Spreads Mixed

    U.S. two-year swap spread, which measures the differential between the two-year swap rate and two-year Treasury yield and is a main gauge of credit risk, was flat at 14.25 basis points. The 10-year swap spread was 0.25 basis points tighter at 8.25 basis points.

    1/4%     2-year   99 31/32    flat       0.258%    flat 
    3/8%     3-Year   99 29/32    flat       0.405%    flat 
    3/4%     5-year   99 9/32     flat       0.895%    flat 
    1 1/4%   7-Year   98 27/32    flat       1.425%    flat 
    2%      10-year   99 15/32    dn 1/32    2.058%   +0.5BP 
    3 1/8%   30-year  97 15/32    dn 2/32    3.257%   +0.3BP 
    2-10-Yr Yield Spread: +180.0 BPS Vs +180.0 BPS 
    Source: Tradeweb 

    Write to Min Zeng at