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Bond Brief: Yields Hit Multiyear Highs

Updated from 11:24 a.m. EDT

Treasuries limped lower Wednesday and yields on both ends of the curve touched multiyear highs in the wake of a lackluster five-year note auction that reaffirmed expectations the Federal Reserve has more interest rate hikes up its sleeve.

Economic reports will now take center stage, including the final reading on fourth-quarter GDP and weekly jobless claims numbers due out on Thursday; data on personal spending, personal income and factory orders are to be released Friday.

In corporates, Lehman Brothers (LEH), Dynegy (DYN), ING (ISG) and Newfield Exploration (NFX) all announced bond sales.

The benchmark 10-year note ended the day down 6/32 to yield 4.81%, the highest that yield has been since June 2004, when the Fed began its monetary tightening campaign. The 30-year bond lost 20/32 to yield 4.84%. Bond prices and yields move in opposite directions.

The two-year note, which is the most sensitive to changes in the fed funds rate, edged lower 1/32 to yield 4.81%, its highest yield since February 2001. The five-year note edged lower 2/32 to yield 4.80%, a four-year high.

The Treasury sold $14 billion in five-year notes at a yield of 4.785%, higher than the 4.776% average forecast and the highest auction yield since February 2001.

The bid-to-cover ratio was 2.25, meaning that for every $1 of debt on sale there was a bid for $2.25, compared with the 12-auction average cover of 2.45.

Most importantly, the auction saw a poor 26% indirect bidder participation rate, compared with the 12-auction average of 35.2%. Indirect bidders include foreign investors and pension funds.

David Ader, a bond strategist at RBS Greenwich, says this group has taken on average 43.3% of the paper issued at the last four auctions.

"There's expectation that rates will go higher. Why buy on par when the price will be less than par next week," says Jack Malvey, chief global fixed-income strategist with Lehman Brothers. Both RBS Greenwich Capital and Lehman are among the 22 primary dealers that must participate in Treasury auctions.

"The Fed tightened and the Fed's not done," Malvey says, adding that the economy is "very bright," the global economy is strong and that we'll soon see $70 a barrel oil.

Lehman economists are looking for first-quarter GDP to clock in at over 5%, and they believe that the fed funds rate could take out 5.50%.

Tuesday's decision by the Fed to raise the overnight lending rate to 4.75% from 4.50% did little to change expectations for another rate hike, and the accompanying policy statement reinforced the view that the central bank's policy decisions are fully data dependent.
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