Does it come as a surprise that the market is falling , just as the US Treasury is about Auction record $104 Billion debt. Now who would be buying Treasury Bonds if the markets were still rallying? Few more days of falls will increase investors appetite for safe haven.
http://www.cnbc.com/id/31494353
The US Treasury market should handily digest a record sale of 2-year Treasury notes on Tuesday, but with the Fed's policy meeting set for later in the week, volatility may persist.
Existing home sales will be another driver for the market, with investors keen to know the state of housing given that slumping home prices and rising foreclosures drove the economy into recession. Monday saw bond prices rally as equity markets sold off.
Treasury prices rose, and even the 2-year note increased despite the auction of $40 billion 2-year notes on Tuesday.
"This signals that there's still demand for shorter-dated Treasuries." said Kim Rupert, managing director of global fixed income analysis at Action Economics.
This week's $104 billion in auctions will mark the largest single-week of debt sales, as the government sells a record $2 trillion of bonds to finance bail-outs and stimulus programs.
"The auction should go pretty well. The 2-year note is trading very high in the repo market, which supports the notion that there's a very short base and not a lot of collateral to be had." said Rupert.
Demand for Treasuries has been volatile, with investors like China and Russia queasy about ballooning U.S. budget deficits, and questions about the timing of a recovery from recession.
Aside from supply, the Federal Reserve's policy meeting ending on Wednesday is the cause of nervousness as investors wonder whether the central bank will expand its quantitative easing program, or act to curb inflation fears by signalling rate hikes on the horizon.
May's existing home sales data could also weigh on the Treasury market. Existing home sales are expected to rise 4.81 million from 4.68 million a month earlier, good news for America's troubled housing sector.
This could revive the equity market—and dampen bond prices' rally. Mortgage rates follow yields on the benchmark 10-year Treasury bond, and mortgage-backed security yields.
The Federal Reserve could increase its Treasury-buying program as a way to keep mortgage rates low.
Investors are not sure whether the Federal Reserve plans to keep its quantitative easing program steady, or decrease the amount of money allotted for purchasing Treasuries.
The Federal Reserve "wants houses to be very affordable. One way to do that is to make sure rates are low. But we've had a 100 basis point change in mortgage rates in a three-month period, and that may start to hinder new purchases if the cycle continues," said William Larkin, fixed-income portfolio manager at Cabot Money Management in Salem, Massachusetts.
Yet worries about government debt and inflation could prompt the Federal Reserve to slowly scale back its buying program on positive economic data and signs that the recession may be easing.
"There are so many cross-currents in data and auctions," said Rupert, that "we'll see some demand for the long end of the curve, but we'll continue to bounce around."
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