(Bloomberg) — U.S. Treasurys have come under renewed pressure, sending yields higher, as the market struggled to absorb the latest leg of new debt sales this week.
Most Read from Bloomberg
The moves extended to a choppy session on Thursday, when weak inflation data for July initially pushed yields lower and fueled speculation that the market will easily digest the $23 billion 30-year bond auction at 1pm New York time.
But even with bonds selling at a yield of 4.189%, the highest yield since 2011, the amount allocated to primary dealers was the largest since February, an indication of weak demand. After that, the 30-year yield jumped to 4.26% in late New York.
The sale was the biggest test of this week’s auctions, when the Treasury Department sold $103 billion in new debt for 3, 10 and 30 years, because long-term bonds usually attract select investors like pension funds and insurance companies. The volume of the 30-year bond sale was $2 billion greater than the last new issue offering in May, and the market is anticipating further increases given the expected deficits faced by the US government.
“It’s a digest recovery situation,” said Gregory Varanello, head of US interest rate trading and strategy at AmeriVet Securities, and with short-term Treasury yields rising, “you get paid to keep the term short.” He said the sale also reflects weak liquidity in the summer.
Treasury yields fell in early trading after the CPI advance was in-line with expectations, supporting expectations that the Federal Reserve is likely to raise interest rates. The 10-year Treasury yield fell 6 basis points to 3.94% before reversing course and jumping back to 4.11% in the late afternoon.
“The sell-off appears to be a reaction to the weak auction,” said Subhadra Rajappa, head of US interest rate strategy at Societe Generale. “It caught me by surprise. Traders had to take down a large piece of paper. It seemed there wasn’t enough real money to participate.”
But she added, “It’s hard to come to an auction outcome in August” when investors are off for the holidays.
Post-auction weakness spilled across the market, with yields between the five- and 10-year indices up 9-10 basis points and at fresh session highs in late New York trading. Traders said the middle portion of the Treasury curve was in focus, with trades favoring underperformance in the 5-year note.
While the bond market initially braced for the latest CPI report, traders are still seeking some risk of another quarter-point Fed hike later this year, as the November meeting swaps showed an interest rate of 5.42%. It’s 5.33% now.
“The market sees the economy now on a more deflationary path, but the labor market remains strong and will keep the Fed on edge,” said Michael Bond, global head of inflation research at Barclays.
Most Read from Bloomberg Businessweek
© 2023 Bloomberg LP