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Debt futures sink

despite solid bond sale

CHICAGO: U.S. debt futures on Thursday, closed lower despite a solid 30-year bond auction in the late afternoon.

Treasury finished its record-sized quarterly refunding by selling U.S. bonds at an average 6.906-percent yield, with a 2.38 bid-to-cover ratio and no tail.

Initially, futures rose to session highs on the favorable auction results but that rise was met by heavy sales to sell in bonds in the cash market, traders said.

Those sales came from dealers who heavily participated in the quarterly refunding and wanted to lighten up on their positions, traders said.

Those dealers who couldn't liquidate in the cash market turned into large sellers of futures to hedge, traders said.

Those sales spun September bonds into a late fast market drop that pushed September through key support levels to spur more selling, traders said. Locals also sold to liquidate long positions established before the auction, traders said.

September bonds broke support at 110-7/32, 110-2/32 and 109-27/32 to fall to the lowest level since Aug 4. September 10-year notes and December Eurodollars also each hit the lowest level since Aug 4.

Technically, some traders and analysts have turned bearish on September bonds. September bonds may have hit a double top at today's session high at 111-00, some said. From here, they expected September to fall to 109-19/32 and then 109-9/32. Below that, they pegged an objective at 108-16/32.

But a few traders were not yet convinced of a downturn yet. They noted that September bonds managed to close above 110-2/32, which could ultimately be the bond's saving grace.

If September could hold above 110-2/32 and open higher on Friday, traders said September could inch back up into its recent trading range of the past 16 days.

But futures could face a tough test on Friday when U.S. July consumer prices and retail sales are due. Most traders expect inflation to be tame. A Reuter survey forecasts overall and core CPI both up 0.2 percent. Overall retail sales are seen up 0.2 percent and up 0.5 percent without autos.

December Eurodollars weakened with bonds, but some traders noted that the front years slightly outperformed. If a downturn materialized in debt futures, some expected front year Eurodollar futures to continue outperforming to cause a yield curve steepening. Prices fell early on dealer selling before the auction.

A smaller-than-expected rise in U.S. weekly jobless also hurt prices early. Reaction was muted to a tame price report.

Implied December Eurodollar options volatility slid to 17.25 pct. December 10-years were 6.9 pct and bonds at 10 pct.

Estimated bond futures volume was 455,000, up from an actual 259,860. Options were about 90,000 versus an official 61,407. Eurodollar futures were about 255,054 versus an actual 209,880 and its options were about 61,903 versus 86,916.

September bonds ended down 19/32 at 110-14/32, 10-years down 8/32 at 108-14/32, December Eurodollars down 0.04 at 94.26 and December T-bills 0.03 at 94.75.-Reuter