Prices of U.S. government debt fell on Thursday following a weak auction of $32 billion in seven-year Treasury notes.
The high yield on the auction came in at 3.37 percent, above the market's expectations.
"The auction went terribly," said Tom Simons, money market economist at Jefferies & Co. "It appears the foreign bid was on the sidelines again as we approach Japanese year-end (March 31)."
Thursday's auction capped a week of $118 billion in new supply which met with a lukewarm reception in the marketplace.
Benchmark 10-year Treasury notes fell 13/32 in price to yield 3.93 percent, the highest since June 11 and up from 3.86 percent at Wednesday's close. The seven-year note dropped 11/32 to yield 3.35 percent, up from 3.29 percent on Wednesday.
Fresh worries about government bonds issued by Greece and Portugal contributed to investors' wariness of sovereign debt, analysts said.
The price of insuring U.S. debt against default rose. Credit-default swap spreads grew to 40 basis points, while the yield on U.S. 30-year bonds reached a nine-month high.
The huge wave of new government debt supply is affecting the price of Treasuries, while a more-or-less steady stream of positive data on the U.S. economy adds to expectations of higher inflation and interest rate increases.
This was particularly evident in the interest rate swaps market where U.S. debt is trading at a discount to private-sector credit.
"Most of the damage was done yesterday," said George Goncalves, an interest-rate strategist at Nomura Securities in New York, referring to Wednesday's steep sell-off following a weak auction of $42 billion in five-year Treasury notes.
The 30-year Treasury bond fell 20/32 in price to yield 4.78 percent, up from 4.74 percent on Wednesday.
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