The Treasury has auctioned off a massive $54 billion in notes and other longer-term securities this week. And at each auction, demand was twice as high as supply.
Although investors are worried that demand for government debt will eventually drop off _ particularly from foreign governments like China _ there are few major signs of that happening yet. As a result, the sell-off in Treasury prices paused Thursday.
The Treasury auctioned of $16 billion in 10-year notes Thursday, after auctioning $30 billion in three-year notes on Wednesday and $8 billion in Treasury inflation-protected securities, or TIPS, on Tuesday.
Keeping a rebound in the market for already outstanding Treasury prices, however, was the expectation that this supply will keep increasing sharply as the government finances its rescue efforts and stimulus packages. President-elect Barack Obama's proposal to cut taxes and aid businesses is estimated to cost about $775 billion.
"We're in the great unknown at this point," said T.J. Marta, a fixed-income analyst at RBC Capital Markets, acknowledging that there are good arguments for both higher and lower Treasury prices.
Also, the Federal Reserve began buying mortgage-backed securities this week, driving demand up in that market and sending mortgage rates down. The Fed said Thursday it has bought $10.2 billion in mortgage-backed securities since Monday.
In afternoon trading, the two-year Treasury note edged down by 1/32 to 100 2/32, and its yield rose to 0.84 from 0.83 percent late Wednesday. The 10-year note rose 15/32 to 111 11/32, and its yield fell to 2.45 percent from 2.50 percent. The 30-year Treasury bond fell 3/32 to 128 9/32, and its yield was flat at 3.04 percent.
The yield on the three-month T-bill, considered one of the safest short-term investments, dipped to 0.09 percent from 0.11 percent.
There were some positive signs out of the credit markets Thursday.
One was that bank-to-bank lending rates dropped again. The London Interbank Offered Rate, or Libor, for three-month loans in dollars dipped by more than 0.04 percentage points to slightly above 1.35 percent, according to the British Bankers' Association.
Another auspicious signal was a large jump in the amount of outstanding commercial paper last week. Commercial paper is short-term debt issued by companies to finance their operations. The Fed began buying the paper last year.
Commercial paper outstanding increased by $83.1 billion, or nearly 5 percent, to a seasonally adjusted $1.76 trillion in the week ended Wednesday, after decreasing in the previous two weeks. That amount is close to the $1.82 trillion outstanding in the market in September before the collapse of Lehman Brothers Holdings Inc. _ an event that sent the credit markets into a deep freeze.
