By Min Zeng
Treasury bond prices held their gains on Wednesday after a sale
of five-year notes drew average demand.
In recent trading, the benchmark 10-year note was 9/32 higher,
yielding 2.686%, according to Tradeweb. When bond prices rise,
their yields fall.
The Treasury paid 1.732% to sell the new five-year notes, the
highest level since 2011. It compared to 1.723% right before the
auction, and a higher yield suggests demand was weaker than dealers
had anticipated.
Analysts said the price strength in the bond market tempered
some buying interest in the $35 billion five-year note auction.
The auction drew $2.79 in bids for each dollar offered, close to
the average of $2.75 per dollar for the past four sales. Demand
from investors--instead of dealers--remains decent with total
bidding of 63.5%.
Bond prices strengthened earlier as a weak U.S. housing report,
geopolitical risks in Ukraine and concerns about China's economy
boosted demand for ultrasafe U.S. government debt.
Among boosters to bond prices Wednesday was an unexpected 14.5%
drop in new home sales in March to 384,000, the lowest drop since
last July and the latest sign of a faltering U.S. housing market
that has struggled to maintain its momentum in the last year.
Investors have also kept an eye on simmering tensions between
Ukraine and Russia over the past week. Russia's Foreign Minister
Sergei Lavrov said Wednesday any attack on Russians in Ukraine will
be perceived as an attack against Russia. The comments came as
Ukraine called for a renewal of a stalled military operation
against pro-Russian forces that have taken over several eastern
cities.
In China, a gauge of manufacturing rose to 48.3 this month from
March's final reading of 48.0, but a reading below 50 continues to
signal contractions. Chinese stocks fell, reflecting ongoing
concerns about the health of the world's second largest economy and
big buyer of commodities.
Larry Milstein, head of government and agency trading at R.W.
Pressprich Co. in New York, said the growth outlook in China and
the U.S. and developments in Ukraine are among the main factors
affecting Treasury yields, and any deterioration could send U.S.
bond yields lower further.
The 10-year Treasury note's yield rose more than one percentage
point last year, driven by the prospect of reduced bond buying from
the Fed. But the yield has fallen this year even as the Fed has
reduced bond buying since January.
Uncertainty over the global growth outlook soothed fears the Fed
may fasten the pace in withdrawing monetary stimulus, renewing
buying interest in haven bonds.
Analysts expect the 10-year yield to stay in the range of 2.6%
to 2.8%, which has dominated the trading since February, until U.S.
data signals the world's largest economy will accelerate.
"The Fed is data dependent and we may need several months of
data to get clarity on the economy," said Jason Evans, co-founder
of hedge fund NineAlpha Capital LP in New York. "My base case is
still that bond yields will slowly and orderly drift higher, but I
don't think we are going to see very violent moves as the Fed's
reduction of bond buying has been baked in the cake."
Mr. Evans said, on a relative value basis, investors can get
better yields in the U.S. than many other core bond markets.
The 10-year Treasury note's yield was much higher than 1.521% on
10-year German bund and 0.611% on 10-year Japanese government
debt.
Write to Min Zeng at min.zeng@wsj.com