Short-term Treasurys fall after 5-year auction

NEW YORK — Short-term Treasury prices fell Wednesday, sending their yields higher, after a disappointing auction of $39 billion in five-year notes.

The auction’s bid-to-cover ratio, a measure of demand, dropped to 1.92 percent from 2.58 percent at an auction of five-year notes in June. Indirect bids, an indication of foreign buying, tumbled to 37 percent of the total bids accepted, compared with 63 percent in June.

“It’s hard to describe it as anything but ugly,” said Michael Pond, an interest rate strategist at Barclays Capital. “The market is beginning to choke on the increases in supply.”

The five-year note had been holding steady prior to the auction, but turned lower after the results were released. Other Treasurys pared their gains. The weak auction results also weighed on the stock market, which ended with modest losses. The Dow Jones industrial average slipped 26 points to 9,071.

It was the second day of disappointing results in Treasury auctions, following a lackluster sale of two-year notes on Tuesday. Demand at that auction was much weaker than at a similar one last month, and there appeared to be fewer foreign buyers.

The Treasury is auctioning off more than $200 billion of bills and notes this week — a record issuance — and investors have been concerned about flagging demand for U.S. government debt as Washington sells massive amounts of it to pay for economic and financial stimulus programs. On Thursday, the government will issue $28 billion of seven-year notes.

In late trading, the five-year note fell 4/32 to 99 29/32, pushing its yield up to 2.64 percent from 2.60 percent late Tuesday. The two-year note fell 2/32 to 99 21/32, and its yield rose to 1.17 percent from 1.08 percent.

Analysts said the weaker results marked a shift in investors’ appetite for shorter-term Treasury debt. Auctions of shorter-term notes have done consistently well this year, whereas auctions of longer-term debt have been more volatile.

“After the initial shock, the bigger concern should be whether there will be enough demand for 10-year and 30-year auctions in two weeks’ time,” Pond said.

The benchmark 10-year Treasury note rose 7/32 to 95 18/32, while its yield fell to 3.67 percent from 3.69 percent.

The 30-year bond rose 27/32 to 95 25/32 and its yield slipped to 4.51 percent from 4.55 percent.

The yield on the three-month T-bill was unchanged at 0.17 percent. Its discount rate was 0.18 percent.

While analysts believe there is still demand for Treasurys, investors seem worried about holding on to debt for too long for fear of inflation, which eats into bonds’ fixed returns over time. Many market players believe inflation is an inevitable consequence of the government’s numerous efforts to stimulate the economy by flooding the financial system with cash and keeping borrowing costs low.

If demand for government debt wanes further, the Treasury will be forced to increase the returns on bonds to lure investors, which in turn can discourage lending by raising borrowing costs for consumers and businesses. Long-term Treasury yields determine interest rates on mortgages and other kinds of loans.

Treasurys got some support Wednesday from more purchases by the Federal Reserve, which bought up $3 billion of long-term Treasury debt. The Fed has been buying large amounts of Treasurys this year in an effort to offset the influx of supply.