Prices for longer-dated Treasurys declined as the government's first sale in 9yrs of inflation-indexed bonds with 30yr maturities drew what was deemed lackluster demand from investors. The $8B auction was the first portion of $126B in U.S. debt sales scheduled for this week. However, short-term yields were supported by further confidence that the Fed won't raise its target interest rate in the near term.

Against this backdrop, yields on 2yr notes fell 4bps to 0.89%. Yields on 10yr notes rose 3bps to 3.80%, after having been higher in earlier trading. Meanwhile, yields on 30yr bonds added 2bps to 4.73%.

 
The Treasury sold the 30yr TIPS at a yield of 2.229%, a little higher than the new securities were trading earlier in the session. TIPS pay investors a coupon plus the rate of inflation as determined by the government's consumer price index.

 
As the first sale of 30yr TIPS since '01, there are few comparisons to gauge how strong or weak demand was for the new security. Bidders offered to buy 2.45 times the amount of debt being sold. That's higher than at any 20yr TIPS auction in recent yrs, noted strategists at Morgan Stanley.

Indirect bidders, a class of investors that includes foreign central banks, purchased 42.4% of the offering. In the last few annual sales of new 20yr TIPS, the closest proxy for the 30yr, more than half of the sale went to indirect bidders, according to Barclays Capital. Direct bidders, which include domestic money managers and used to take a very small proportion of auctions, bought 6.4% of the 30yr TIPS sale.

 
In recent months, analysts have also paid more attention to how much of each auction is bought by so-called direct bidders. A higher proportion of an auction going to indirect and direct bidders is deemed good for the government and the market because it indicates better demand for the debt by investors who will tend to hold the new securities.

The Treasury opted to switch to issuing 30yr TIPS instead of 20yr TIPS to better match the needs of investors who buy regular 30yr bonds. The U.S. doesn't sell 20yr bonds. The 30yr TIPS security may be deemed attractive to investors worried about rising inflation, especially in light of the Fed's accommodative monetary policy. As for the closest break-even rate for the auction, the TIPS maturing in April 2029 yield 2.4 percentage pts less than regular Treasurys maturing at the same time.

The TIPS bond auction will be followed by $44B in 2yr notes to be sold on Tues. and $42B in 5yr debt on Wednesday. The final auction of the week will be for $32B in 7yr notes.

 
Janet Yellen, president of the San Francisco Fed, said in a speech that she doesn't support "for the time being" any increase in the government's zero-interest-rate policy in light of her outlook calling for the U.S. economy to remain sluggish.

Shorter-dated securities had been higher as investors pared bets that the Fed is closer to raising its target borrowing rate, after having created a stir in financial markets last week by making a technical change to an emergency rate for banks.

Treasury prices declined last week as investors absorbed the Fed's surprise move to raise its discount rate.