Who Out There Needs Bonds?

If investors haven't picked up any government bonds yet, they'll have a big opportunity in the coming week. Of course, it won't be the last chance they'll get.

Several Treasury note auctions will be held over the next five sessions, although the three major ones will come in the middle of the week. Tuesday will see a $35 billion auction of 3-year Treasury notes, Wednesday will have a $19 billion auction of 10-year notes, and Thursday will see an $11 billion 30-year bond auction.

After a week where the focus fell on General Motors' (GMGMQ Quote) bankruptcy filing and the latest read on the labor market, Treasury auctions may not seem all that interesting. But market analysts say the outcome will point the direction for stocks over the near term.

The reason, says Robert Pavlik, chief market strategist with Banyan Partners, is that these auctions will show how successful the Treasury will be in its ongoing saga of having to issue new bonds to fund its programs. With a rate of 3.89% on the 10-year note, Pavlik says its recent climb closer to 4% is "worrisome."

"It will be interesting to see where the 10-year note auction prices, as well as the bid-to-cover ratios," said Pavlik. "Worse-than-expected results from the auctions will mean higher interest rates and pressure on the market. Better-than-expected results, however unlikely, will mean lower interest rates and the market will see a bid."

Michael Pento, senior market strategist with Delta Global Advisors, takes a harder stance on what the Treasury auctions will mean next week, arguing that "it is not possible to underestimate the importance."

"If the 10-year note auction does not perform well, and it might not because of the weakness we've seen in the dollar, we might see foreign investors balk at this," Pento said. "If that doesn't go well, you will have to really focus myopically on what [Federal Reserve Chairman Ben] Bernanke does and whether he will allow that rate to rise. I don't think there is anything more critical in the market."