CHICAGO -- U.S. Treasury debt prices fell Wednesday, pushing benchmark yields up sharply after news from the housing market suggested the Federal Reserve may not need to cut interest rates aggressively in 2007.
A mild-morning bounce off the day's lows ended after results of the Treasury's $20-billion two-year note auction were weaker than expected.
The high yield of 4.765 percent at the sale was higher than expected, and indirect bidder participation fell sharply compared with November.
The auction "was disappointing, especially relative to recent auctions," said strategists at Action Economics in Boulder, Colorado.
The Commerce Department earlier said U.S. new home sales rose 3.4 percent in November, more than expected, and sales for the previous three months were revised higher by an average of about 1.5 percent.
Story Continues Below
"It shows stabilization of home sales and inventories beginning to return to more normal levels," said Michelle Meyer, economist at Lehman Brothers in New York.
The 10-year Treasury note fell 14/32 for a yield of 4.66 percent, up from 4.60 percent.
The benchmark note yield has risen from 4.47 percent early this month; a push above 4.67 percent could set up a test of 4.73 percent from early November. A major downtrend drawn from the June and October highs also crosses at 4.63 percent.
Many of the bleakest views on U.S. growth for 2007 - and related expectations for aggressive Fed rate cuts - have been tied to fears that housing market weakness will infect the broader economy.
Wednesday's report "supports our view that as the housing correction evolves, residential investment, which collapsed 18.7 percent in Q3, will cause less drag on GDP growth throughout 2007," said T. J. Marta, fixed-income strategist at RBC Capital Markets in New York.
In short-term rate futures the implied chances for a first-quarter Fed cut fell as low as 12 percent from 18 percent.
A rate cut is now longer fully priced by mid-year, but futures show the federal funds rate by the end of 2007 at 4.75 percent versus the current 5.25 percent.
Thirty-year bonds dropped 25/32 for a yield of 4.78 percent, up from 4.73 percent.
Some of the early selling in cash bonds spilled over from futures, where the March contract dropped through technical support at 112-05 on the way to a seven-week low.
Five-year notes were down 8/32 at a yield of 4.64 percent, up from 4.58 percent, while two-year notes were 4.78 percent, up from 4.72 percent.
© Reuters 2006. All rights reserved. Republication or redistribution of Reuters content, including by caching, framing or similar means, is expressly prohibited without the prior written consent of Reuters.
Editor's note:
Alan Greenspan Warns of Housing Bust, Worse....
Protect yourself from the coming real estate crash . . . read this! Click Here
Profit from Greenspan`s Recession!
