Bonds fall as investors return to stocks

U.S. Treasurys tumbled Wednesday as investors moved back into stocks a day after Wall Street's worst fall in three weeks.

Gains of more than 1 percent in the main stock indexes sapped the strength of long-dated government bonds, as equities investors tried to put turmoil in credit markets on the back burner, at least temporarily.

Still, an auction of two-year government debt attracted exceptionally strong demand, measured by the bid-to-cover ratio. This reflected a continuing search for safe investment havens after recent volatility, while similarly, rates on one- and three-month T-bills fell.

"Even though stocks rebounded nicely, we saw a lot of money coming into the front end. The two-year auction also exhibited a similar kind of safe-haven result, very strong bidding," said Kim Rupert, managing director for global fixed income analysis at Action Economics LLC in San Francisco.

"You have to go back to 1991 before you find a larger bid-cover."

Two-year notes fell 5/32 in price, pushing the yield up to 4.16 percent. Bond yields move inversely to prices.

Benchmark 10-year Treasury notes fell 17/32 in price, lifting the yield to 4.57 percent from 4.51 percent late on Tuesday.

"The front end continued to see very solid demand, particularly the bills. Again, it's just ongoing uncertainty and concerns about the credit situation, need for liquidity and just a flight-to-safety bid largely," said Rupert.

The 30-year fell 16/32, or $5 on a $1,000 note, yielding 4.88 percent, up from 4.85 percent Tuesday.

The auction of two-year debt attracted bids worth 3.97 times the amount on offer, well above the average of previous sales this year.

"It was a very healthy auction: it looks like we are pricing in the flight-to-quality via the auction, which was almost four times oversubscribed," said George Goncalves, chief Treasury/TIPS and agency strategist with Morgan Stanley in New York.

In currency trading, the dollar gained against the yen, trading at ¥116.18, up from ¥114.40 Tuesday, while the euro bought $1.3672, up slightly from $1.3609 Tuesday.