Treasuries Mark First Decline in a Week as Auction Demand Fades

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Treasuries fell for the first time in a week as a sale of two-year notes drew tepid demand, and as most global stock markets stabilized after a days-long rout.

The longest maturities led the declines, pushing 10-year yields up the most in three weeks. Treasuries pared their drop as U.S. stocks wound up falling on the day, surrendering a morning rebound. Losses in global equities in the past week had fueled a flight into government debt.

Underscoring the turbulence traders have endured, a measure of expected volatility in Treasuries was close to the highest since February, according to the Bank of America Merrill Lynch MOVE Index, which reflects the cost of using options to protect against price swings.

“We should look for more volatility,” said Christopher Sullivan, who oversees about $2.4 billion as chief investment officer at United Nations Federal Credit Union in New York. “The macro environment has become more uncertain globally.”

The U.S. 10-year note yield climbed seven basis points, or 0.07 percentage point, to 2.07 percent as of 4:59 p.m. New York time, according to Bloomberg Bond Trader data. The 2 percent security due August 2025 fell about 5/8, or $6.25 per $1,000 face amount, to 99 11/32.

The 10-year yield has dropped from about 2.5 percent in late June.

Fed Calculus

The Standard & Poor’s 500 Index fell back into a correction in the last minutes of trading Tuesday. It lost 1.4 percent on the day, after earlier rallying as much as 2.9 percent. It reached the correction territory for the first time since 2011 on Monday amid growing concern the global economy is slowing. The selloff prompted traders to pare bets that the Federal Reserve will raise interest rates this year. European shares rebounded Tuesday.

“When the market gets like this, you see a lot of long-term money pull to the sidelines, and you get momentum players pushing the market back and forth,” said Thomas Roth, a senior Treasury trader in New York at Mitsubishi UFJ Securities USA Inc.

In a sign the appetite for safe-haven buying has waned, the U.S.’s sale of $26 billion of two-year notes drew the weakest demand for the maturity since October. It’s the first part of $103 billion of coupon-bearing debt to be auctioned this week.

The offering’s bid-to-cover ratio, which gauges demand, fell to 3.16, the lowest since October.

On top of that, a smaller share of non-dealer bids was accepted than last month, indicating “weak participation,” according to Jim Vogel, an interest-rate strategist with FTN Financial in Memphis, Tennessee.

That suggests the market “may have gone too far in counting out Fed action this fall,” he wrote in a note.

Investors’ appetite for Treasuries also dimmed as China’s central bank cut interest rates for the fifth time since November and lowered the amount of cash banks must set aside.

Developed-nation sovereign bonds are still headed for a monthly gain. The Bloomberg Global Developed Sovereign Bond Index has returned 3 percent in August, set for the best month since April 2011.