Treasurys extend rise after confidence data

NEW YORK (MarketWatch) — Treasury prices climbed Tuesday, sending yields lower after housing and consumer-confidence data showed waning optimism about economic growth.

The 10-year Treasury note (10_YEAR)  yield, which moves inversely to price, fell 3 basis points on the day to 2.677%. The 30-year bond (30_YEAR)  yield fell 3 basis points to 3.698%, and the 5-year note (5_YEAR)  yield fell 2 basis point to 1.432%.

Conference Board data on Tuesday showed that a consumer confidence index fell to 79.7 in September from a revised 81.8 in August. That beat economists' projections of a drop to 79.5, but registered at the lowest in four months on renewed worries about wages and job availability.

Home prices rose by a seasonally adjusted 1% in July, according to Federal Housing Finance Agency data Tuesday, an 8.8% jump from the same period a year ago. The S&P/Case Shiller 20-city composite index showed a 1.8% rise in July, the smallest jump since March.

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The consumer and housing results come as the bond market is once again on alert for data that could shed light on when and how the Federal Reserve acts to scale back the pace of its $85 billion in monthly bond buys, which had been used to help stimulate economic growth. The central bank's decision not to taper at its policy meeting last week surprised many market participants, who saw bonds sell off sharply during the summer in anticipation of Fed action.

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Given the Fed's dovish tone, some are now projecting yields to move lower.

"On a risk-adjusted basis, we believe that Treasurys offer good value as yields recede following the recent rise," said HSBC Global Research strategists, led by Fredrik Nerbrand, global head of asset allocation, in a note. "Our fixed-income strategists expect the 10-year U.S. Treasury yield to fall to 2.1% over the next 12 months. Such a move should have a sizeable impact on the entire financial landscape."

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Meanwhile, New York Fed President William Dudley said on CNBC Tuesday that markets should not have been surprised by the Fed's decision to hold off on tapering.

The 2-year note yield (2_YEAR)   traded on Tuesday at 0.334%, down half a basis point on the day, ahead of an auction of $33 billion of the notes. The auction represents a reduction of $1 billion from last month's sale of 2-year notes, and $2 billion from prior sales as the U.S. government's reduced deficit decreases the amount of borrowing.

Given the recent decline in yields, some analysts expect mediocre auction demand.

"Relative value does not look super compelling, as curves (short end vs. belly) have remained steep," said Stanley Sun, strategist at Nomura Securities, in a note. "The 2-year yields are also getting close to June [Federal Open Market Committee] levels and should require some concession pre-auction. Net, we expect only an average auction as the pros roughly balance the cons."

The Treasury Department will also sell $35 billion of 5-year notes on Wednesday and $29 billion of 7-year notes on Thursday.