Treasury prices extend losses in flight to stocks

Treasury prices fell for a second straight session Wednesday as investors grew increasingly optimistic about the ability of banks and brokerages to weather the credit crisis.

The drop in Treasurys came as the government sold $31 billion of two-year notes Wednesday afternoon in an auction met with relatively tepid demand, said Jay Mueller, an economist at Well's Capital Management.

"I think that shows that people are somewhat leery of short maturities, which have been pretty soft over the last week," Mueller said.

The Treasury Department will issue about $21 billion of five-year notes on Thursday. The auctions increase the amount of debt, and the increase in supply tends to send prices lower.

In addition, investors moved out of the relative safety of government debt and placed more bets on equities. The stock market has risen for the past two sessions due to lower oil prices and relief that financial companies don't need to raise new capital to offset losses. Shares of banks and brokerages continued their ascent on Wednesday.

In late trading, the 10-year Treasury note fell 2/32 to 98 2/32. Its yield rose to 4.12 percent from 4.10 percent on Tuesday, according to BGCantor Market Data. Yields move in the opposite direction as prices.

The 30-year long bond - typically the most sensitive to inflation worries - fell 9/32 to 95 6/32. Its yield rose to 4.68 percent from 4.66 percent Tuesday.

The 2-year note fell 1/32 to 100 8/32, and yielded 2.74 percent, up from 2.73 percent. Short-term debt is more sensitive to changes in interest rates.

The 3-month Treasury bill's yield rose to 1.57 percent from 1.52 percent on Tuesday, and the discount rate rose to 1.55 percent from 1.50 percent.

"We continue to trade counter to stocks; when the stock market rallies then Treasurys sell off," said Mueller. "We've seen stocks rise because some of the earnings haven't been as bad as feared, and we've seen oil come way down."

(This version CORRECTS UPDATES trading throughout; corrects Mueller's company to Well's sted Strong Capital Management.)