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Treasury Yields Resume Climb After Auctions Stir Supply Anxiety

The US Treasury Department in Washington, DC. (Al Drago/Bloomberg)

(Bloomberg) -- US government bond yields rose as weak demand for a pair of Treasury note auctions suggested investors are anxious about supply on the eve of the next financing quarter. 

Yields across maturities rose at least four basis points, reaching the highest levels in more than two months, after the monthly auctions of two- and five-year Treasury notes both drew higher-than-anticipated yields. The benchmark 10-year note’s yield climbed as much as six basis points to nearly 4.3%, the highest level since July 10. 

Activity in Treasury options showed traders favoring hedges against a deeper selloff, with focus on a potential rise in 10-year yields to as higher 4.5% by end of November.

The results signal potential difficulty for four additional Treasury auctions this and next week. Bond investors are wrestling not only with an uncertain outlook for additional Federal Reserve interest-rate cuts — which would support the value of existing securities — but also with the prospect of bigger auctions down the road.

The approaching US presidential election is exacerbating that concern as neither candidate has prioritized deficit reduction, veteran economist Edward Yardeni said on Bloomberg Television Monday.  

The Treasury Department is slated to announce sizes of next week’s auctions of three- and 10-year notes and 30-year bonds on Wednesday and the likely sizes of its other auctions during the November-to-January period. While no changes are expected from current levels, increases next year are viewed as inevitable based on federal budgetary trends.

To be sure, Monday’s auctions were susceptible to demand shortfalls. At $69 billion and $70 billion respectively, the two- and five-year note sales are the biggest of the Treasury’s monthly fixed-rate offerings, and are normally held on separate days. This week’s three sales — including a $44 billion seven-year note on Tuesday — are earlier and more tightly clustered than normal because of the timing of their month-end settlement date.

(Adds closing prices throughout, details on options trading in third paragraph)

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