U.S. Treasurys rose in price Thursday, retracing a portion of a dramatic sell-off earlier this week after strong demand, particularly from foreign buyers, in an auction of 30-year bonds.
The sale of $13 billion of reopened 30-year bonds was done at a yield below the level trading on the open market, indicating investors bid aggressively for the debt.
"A great, great auction to end the week and the recent outperformance in 30-years was a strong hint that buyers lurked," said William O'Donnell, head of U.S. Treasury strategy at RBS Securities Inc in New York.
Investors were particularly encouraged by foreign demand for the longer-dated U.S. debt. Indirect bidders, which include foreign central banks, purchased the largest percentage of the debt sale since the 30-year bonds were reintroduced in February 2006.
"Massive foreign buying on 30 years — demand was excessive," said Thomas di Galoma, head of fixed-income rates trading at Guggenheim Securities in New York.
Bargain-hunters have emerged since Wednesday's mediocre 10-year auction, assuaging some concerns investors had lost confidence in U.S. government debt, analysts said.
Benchmark 10-year notes Thursday afternoon were yielding 3.22 percent, down from a high yield of 3.34 percent in an auction of $21 billion of the reopened notes Wednesday.
The bond market was pummeled earlier this week by inflation and deficit fears after the announcement of a deal by President Barack Obama and Republicans to extend federal tax cuts.
The market was oversold and due for a correction after the sell-off, which pushed benchmark 10-year yields to six-month highs, analysts said.
"The sell-off was overdone. We expect the market will rally into year-end," said Eric Van Nostrand, interest rate strategist at Credit Suisse in New York.
Nostrand forecasts the 10-year note yield would fall to 2.90 percent by year-end, helped by a likely bond-friendly policy statement from the Federal Reserve after its meeting next week.
But Greg Faranello, head of global markets trading and treasury at Espirito Santo Investment in New York sees yields renewing their rise, with 10-years possibly at 3.50 percent.
"There's still some pain in the air," Faranello said. "We may not find that (support) base until 2011."
Fed policymakers are scheduled to meet Tuesday. They will likely reiterate support for their controversial $600 billion bond purchase program, dubbed QE2.
This second round of quantitative easing, which began last month, was intended to stimulate investment and to lower unemployment. Critics charged QE2 damages the dollar and will lead to an inflation surge once U.S. growth accelerates.
Thirty-year bonds Thursday were trading a point higher in price to yield 4.39 percent, down from 4.46 percent late Wednesday.
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