Bond Report: Treasury Yields Close Lower In Subdued Holiday Trade

U.S. Treasury yields finished lower on Tuesday in holiday-thinned trading after strong demand for an auction for government paper helped spur bond-buying in the session.

Trading in the bond-market closed at 2 p.m. ET based on recommendations from the Securities Industry Financial Market Association, and will be closed for the Christmas holiday on Wednesday. European government bond markets were closed on Tuesday.

How did Treasurys trade?

The 10-year Treasury note yield TMUBMUSD10Y, -1.40%  shed 2.5 basis points to end at 1.909%, after closing at its highest levels in more than 5 months on Monday. The 2-year note rate TMUBMUSD02Y, -1.54%  fell 1.5 basis points to 1.639%, its biggest daily yield decline since Dec. 13, according to FactSet data. The 30-year bond yield TMUBMUSD30Y, -1.10%   declined 2.3 basis point to 2.339%, its lowest yield since Dec. 17.

What drove the market?

The U.S. Treasury Department’s sale of $41 billion of 5-year notes drew such strong demand that it pulled yields lower on Tuesday. The auction “stopped through” by 1.6 basis points, its biggest gap since Feb. 2016. In other words, the highest yield the Treasury sold in the auction was 1.6 basis points below the highest yield expected when the auction began — the “when issued” level.

Investors eyed some news on trade. President Donald Trump said he would hold the signing ceremony for a “phase one” trade deal when he and Chinese leader Xi Jinping get together. But with Xi not expected to be at Davos, Switzerland, for the annual World Economic Forum meeting from January 21 to 24, it’s not clear where they will meet.

Abroad, Chinese Premier Li Keqiang said on Monday the government would study more measures to lower borrowing costs for smaller companies, raising hopes that policy makers would look to stimulate the world’s second largest economy.

What did market participants say?

“It’s a holiday-shortened week and year-end, so it’s hard to put true credence on the auction numbers. But if there is a takeaway, there’s still going to be tremendous amount of demand for U.S. assets in 2020,” Eric Souza, senior portfolio manager at SVB Asset Management, told MarketWatch.

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