Treasurys decline after 5-year note auction

SAN FRANCISCO (MarketWatch) � Treasurys fell Tuesday following an unimpressive auction of 5-year notes as investors also digested data showing a decline in home prices and weaker consumer confidence.

The Treasury Department sold $35 billion in 5-year notes 5_YEAR �at a yield of 0.889%, the highest auctioned yield since late March, when it was 1.04%.

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Bidders offered to buy 2.88 times the amount of debt sold, compared with an average of 2.84 times at the last six sales.

Indirect bidders, a group that includes foreign central banks, bought 39.7%, versus an average of 40.8% over the past six sales. Direct bidders, which includes domestic money managers, purchased another 16.8%, versus an average of 14.8% over the past six sales.

It was �a solid but not spectacular auction,� said George Goncalves, a bond strategist at Nomura Securities, who pointed out in a note that direct bidders had bought more than 30% of 5-year bonds in December�s auction.

Before the auction, Goncalves warned that Monday�s relatively strong auction of $35 billion in 2-year notes 2_YEAR could �cannibalize demand� for the 5-year note.

The broader bond market moved lower after the auction. Yields on 10-year notes 10_YEAR rose nearly 4 basis points to 2.00% in recent activity. Earlier in the day, the yield had been as low as 1.95%.

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Bond prices move inversely to yields. A basis point is one one-hundredth of a percentage point.

Yields on 30-year bonds 30_YEAR �also advanced nearly 4 basis points to 3.18% in recent activity, after being as low as 3.13% earlier.

The boost in 10- and 30-year yields shows investors are already bracing for challenged auctions in those issues in the next few weeks, said Michael Pond, head of global inflation-linked research at Barclays.

�The auction was obviously a slight disappointment,� said Pond, adding that the market had been under pressure all day following the home sales and consumer confidence data.

On Wednesday, the Treasury will auction $29 billion in 7-year notes 7_YEAR . That auction, however, will have to contend with the release of GDP data and a statement from the Federal Open Market Committee at 2:15 p.m. Eastern time Wednesday. Read more on Fed meeting.

�The outlook for the 7-year auction is less constructive given the fact its proximity to the Fed will limit the time to square positions and thereby curtail more aggressive bidding,� said CRT Capital Group in a note.

Earlier, Treasurys faced headwinds from data showing November home prices declining in 10 out of 20 cities, but rising on the whole 0.6% after seasonal adjustments. Read more on November home prices.

Also, January consumer confidence fell well below analyst expectations as higher payroll taxes kicked in with the new year. Read more on January consumer confidence figures.

U.S. stocks closed mostly higher with the Dow Jones Industrial Average up 0.5%, S&P 500 Index SPX �up 0.5%, and the Nasdaq Composite Index COMP �down less than 0.1%. Read more on U.S. stocks.