Bond Brief: Slipping Ahead of Supply

Long-dated Treasuries sink ahead of planned sales of $22 billion in debt later this week.
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Updated from 12:24 p.m.

Long-dated Treasuries sank Tuesday amid thin trading with few economic indicators to guide the market, as many players chose to sit it out until more compelling data are released in the back half of the week.

The benchmark 10-year note ended the day down 15/32 to yield 4.43%, up from 4.37% late Monday. The 30-year bond sank nearly a full point to yield 4.61%, up from 4.56% in the previous session. Bond prices and yields move in opposite directions.

The two-year note edged down 3/32 to yield 4.40%, and the five-year lost 8/32 to yield 4.34%.

"We really don't need to worry too much about this," says Hugh Johnson, chairman of Johnson Illington Advisors. "There is a view that the

Treasury market is overvalued, and that we're due for a correction. Money may come out of the 10-year and move into short-term maturities."

The market could see a bit more action Wednesday after New York Federal Reserve Bank President Timothy Geithner, a voting member of the

Federal Open Market Committee

, speaks on monetary policy at noon. Federal Reserve Board governor Mark Olson is also slated to discuss Fed responsibilities at 7:30 p.m. EST.

The market did not react much to a report that showed a 0.4% rise November wholesale inventories, which came in just under the forecast 0.5% increase. It also shrugged off a speech on education and economic impact delivered by Cleveland Federal Reserve Bank President Sandra Pianalto.

Instead, he says that expectations were beginning to edge higher for a fed funds rate hike in March, which has dragged on longer-maturity Treasuries.

Interest rate futures show a 96% chance that the Federal Reserve will raise the overnight lending rate by a quarter point to 4.5% in January, a move that the market has long assumed was a sure thing. But the fed funds futures show the odds of an increase to 4.75% in March are at 54%, up from the 44% chance priced in last Friday.

While the March hike is still a close call, Johnson says the December employment numbers boosted some expectations for the fed funds rate to hit 4.75% this spring.

"There was tightening in the labor market as unemployment dipped a bit and upward pressure on wages," he says. "The capacity utilization rate rose to 80.6%, showing a tightness in capital markets as well.

"This resources constraint could signal to the Fed that they still need to raise interest rates, even if the core inflation rate is tame," Johnson adds.

Dealers also braced themselves for billions in debt to come onto the market, which also could have depressed prices.

The Treasury sold $8 billion worth of four-week bills, drawing 4.07% with a bid-to-cover ratio of 3.79.

It announced that it would auction $13 billion of five-year debt on Wednesday and $9 billion of 10-year Treasury inflation-protected securities, or TIPS, on Thursday.