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Treasuries Little Changed Ahead of 10-Year Auction

Earlier, flight to quality boosted bonds.

Treasuries were little changed this morning ahead of today's 10-year note auction, the second leg of the three-day quarterly refunding. But bonds were higher earlier on flight-to-quality buying, after

General American Life Insurance

told regulators it couldn't meet redemption demands from investors and was downgraded by major credit rating agencies.

"When somebody goes bankrupt, buy bonds," said Larry Dyer, government strategist at

Credit Suisse First Boston


Lately the 30-year Treasury bond was up 1/32 to trade at 86 22/32. The yield was steady at 6.25%. The market was gearing up for today's sale of $12 billion of 10-year notes until General American changed the picture, if only for a day.

The insurance company has issued about $6.8 billion in short-term funding agreements, bond-like instruments that give investors, in many cases, the right to demand return of principal with just seven days' notice, according to published reports.

Demands for return of principal began en masse after

Moody's Investors Service

downgraded General American's debt rating to junk from investment grade, and

Standard & Poor's

downgraded the company to one level above junk. The downgrades were issued after the company reclaimed $3.4 billion of these agreements backed by its former marketing and reinsurance partner,

ARM Financial

. ARM recently reported a $173 million quarterly loss related to the funding agreement business.

"This is a company that's unable to meet its obligations. It seems, long term, to be a one-off event as long as you don't find that other companies have the same set of trouble," Dyer said. "But short term, it's a headline risk."

The short end of the curve is outperforming bonds because these are short-term agreements, but also because flight-to-quality buying tends to benefit the short end. Lately the two-year note was up 1/32 to 99 16/32, just off its high of 99 17/32, while the five-year rose 3/32.

Demand for yesterday's $15 billion five-year auction was moderate, but sources predicted today's auction will not be as well received. Bids on the auction are due by 1 p.m. EDT, and the Treasury will announce auction results at 1:30 p.m. The five-year note was sold yesterday at 6.014%.

The Federal Reserve's

Beige Book

, an anecdotal survey of economic conditions across the country, will be released at 2 p.m. This report may not carry as much importance as when it was last released June 16 because the market's fully expecting that the Fed will raise the fed funds target by 25 basis points at its next meeting Aug. 24. The last Beige Book said "persistently tight labor markets have resulted in many reports of increased wage pressures," and turned out to be a good flag for those trying to guess whether the Fed would raise the funds rate, which it did June 30.