Treasurys pare losses after data, before auction

SAN FRANCISCO (MarketWatch) � Treasury prices fell slightly on Wednesday in the wake of a tepid government auction to sell 5-year Treasurys.

Yields on 10-year notes 10_YEAR , which move inversely to prices, rose 2 basis points to 2.20% after being up as high as 2.22% before U.S. economic data released early in the session.

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Thirty-year bond yields 30_YEAR �were up 1 basis point at 3.31%.

A basis point is one one-hundredth of a percentage point.

Yields on the current 5-year note 5_YEAR �also rose 1 basis point to 1.03%.

The Treasury Department sold $35 billion in 5-year notes at a yield of 1.040% with bidders offering to buy 2.85 times the amount of debt sold, below the average of 3.00 times from the last six sales of 5-year notes, according to Nomura Securities.

Indirect bidders, a group which includes foreign central banks, purchased 41.9%, compared to 46% from recent sales. Direct bidders, a class which includes domestic money managers, bought another 11.3%, versus an average of 11.8%.

Nomura rated the result of the auction a C+, noting that the bid-cover and nondealer metrics came in at the lowest in more than six months.

�We think this is a sign that the recent rally is getting stretched, unless we get more dovish intervention from the Fed,� said Nomura bond strategists in a note.

Andrew Wilkinson, chief economic strategist at Miller Tabak & Co., also said demand for Treasurys was reasonably firm, but �it was a little surprising not to see just a little bit more interest.�

Bonds had gotten a slight bounce earlier after a report showed U.S. orders of durable goods rose 2.2% in February, a slower pace than some analysts expected. See story on durable-goods orders

�The pace of capital spending intention remains disappointing,� said Millan Mulraine, senior macro strategist at TD Securities. �With the weak performance in the first two months of the year, capital investment looks set to provide only marginal support to economic activity this quarter.�

Weak U.S. stocks also helped to divert some interest to the debt market from equities. The S&P 500 Index SPX closed down 0.5%. See story on U.S. stocks.

Click to Play Markets hang on Fed�s every word

A look at how markets and traders are tuned in to comments made by Fed Chairman Ben Bernanke. (Photo: Reuters/Jonathan Ernst)

On Thursday, the U.S. will conclude its auctions for the week by selling 7-year notes 7_YEAR .

Yields home in the range

The Treasury market is in the process of establishing a new trading range, with most seeing 10-year yields remaining between about 2.10% and 2.40%.

Yields jumped markedly two weeks ago, pushing them out of a range that had persisted for months, after the Federal Reserve�s policy statement led investors to believe they were less inclined to continue easing by buying more bonds.

On Monday, Fed Chairman Ben Bernanke said the central bank isn�t certain yet the recent pace of improvement in the labor market will be sustained, noting that more rapid economic growth will be required to see further declines in unemployment. Read more on Bernanke�s speech Monday

�While speculation is rising that the long-awaited bear market in bonds has arrived, we believe that such thinking is premature,� said Thomas Higgins, global macro strategist for Standish Mellon Asset Management Co., which oversees about $86 billion in assets. �There are a number of factors that could limit how far interest rates can rise in the short term, including the Federal Reserve�s intervention in the Treasury market to keep long-term interest rates low.�

Also limiting a rise in yields will be slow growth as Americans pay down debt, and geopolitical risks, he wrote in a report Wednesday.