Treasury yields rose Monday and 10-year yields rose to their highest level in nearly seven months after the U.S. Treasury Department announced this week the sale of short- and medium-term debt. But volumes were weak in the absence of investors ahead of the Christmas holidays on Wednesday.
Good demand met the $69 billion sale of two-year bonds on Monday, the first $183 billion coupon offering this week.
The bonds sold at a high yield of 4.335%, close to the level they were trading at before the auction. The demand was 2.73 times higher than the value of the debt offered.
Indirect bidders won 82.1% of the sale, a record share according to Lou Brien, strategist at DRW Trading. “This indicates strong foreign demand,” Brien said.
The U.S. Treasury will also sell $70 billion in five-year bonds on Tuesday and $44 billion in seven-year bonds on Thursday.
The auctions are testing demand for U.S. government debt after a sell-off triggered in part by concerns that inflation remains above the Federal Reserve’s 2% annual target.
Last week, Fed policymakers lowered their rate cut projections for 2025 to 50 basis points from 100 basis points and raised their inflation forecasts.
The U.S. central bank cut interest rates by 25 basis points as expected, but Fed Chair Jerome Powell said further reductions in borrowing costs now depended on further progress in reducing pricing pressures.
“The biggest surprise was the upward revision of inflation next year. Fed officials expect an inflation rate of 2.5% by the end of 2025, higher than the 2.1% forecast in September and, much likely, reflecting uncertainty from potential trade wars,” Jeffrey Roach, chief economist, and Lawrence Gillum, chief fixed income strategist at LPL Financial, said in a report Monday.
US President-elect Donald Trump has warned he may implement more tariffs on trading partners, which analysts say could lead to higher inflation.
Money market traders are currently pricing in a 35 basis point rate cut by the Fed for next year, indicating they see a less than 50% chance that the US central bank will make a second 25 basis point cut.
Data on Monday showed new orders for major capital goods produced in the United States rose in November amid strong demand for machinery, while sales of new homes rebounded after being hit by hurricanes, offering further signs that the economy is on solid footing at the end of the year.
Benchmark 10-year bond yields rose 7.3 basis points to 4.597%, their highest level since May 30.
Two-year bond yields, highly sensitive to the Fed’s interest rate policy, rose 3.5 basis points to 4.347%.
The yield curve between two- and 10-year bonds steepened about 4 basis points to 24.9 basis points. It hit 27.6 basis points on Thursday, the steepest slope since June 2022.
The bond market will close early Tuesday and remain closed Wednesday for the Christmas holiday.
Source: Terra
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