U.S. Government Bonds Hit by New Debt Sales

By Min ZengFeaturesDow Jones Newswires

A bout of selling hit the U.S. government bond market on Tuesday, reversing earlier gains following the deadly terrorist attack in Manchester.

The yield on the benchmark 10-year Treasury note settled at 2.285%, up from 2.254% Monday. Yields rise as bond prices fall. The yield was still down from 2.446% at the end of 2016.

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Traders said new debt sales from both the Treasury and the private sector chipped away the haven flows in the bond market. The Treasury on Tuesday auctioned off $26 billion of two-year Treasury notes, which will be followed by a $34 billion sale of five-year notes Wednesday and a $28 billion sale of seven-year notes Thursday.

In addition, corporate bond supply has been robust this week as the political jitters surrounding the Trump administration that rattled markets last week have eased, said analysts. Firms and banks that underwrite new corporate debt typically sell Treasurys to hedge against unwanted interest-rate swings, reflecting the Treasury bond market's role as a bedrock for global finance.

"We see a rush of corporate issuance to squeak through the pre-Memorial day spigot," said Russ Certo, managing director of rates trading at Brean Capital LLC.

Also driving Treasury yields higher Tuesday afternoon, said some traders, was a report from Reuters that hearings in the Senate and House of Representatives on Tuesday showed there is no evidence of collusion between Trump's presidential campaign and Russia. Reuters cited a White House spokesman as saying that President Donald Trump never jeopardized intelligence sources.

The bright side of higher yields: they attracted buyers to the two-year note auction. Overall demand for the sale reached a one-year high.

The outcome surprised some traders given the high expectation that the Federal Reserve will act in a few weeks. U.S. stocks have rebounded from last Wednesday's big selloff, while the U.S. dollar has been weakening this year, which gives the Fed some room to tighten monetary policy.

Some analysts say the auction results suggest some investors are skeptical whether the Fed would raise rates during the second half of this year given the uncertainty surrounding fiscal stimulus and the outlook for the U.S. economic growth and inflation.

"There is skepticism about how much the Fed can actually tighten," said Mary Ann Hurley, vice president of trading in Seattle at D.A. Davidson & Co.

The minutes of the Fed's May 2-3 meeting are due Wednesday afternoon. Investors will zero in on clues about the pace of interest-rate increases as well as discussions about how to wind down the a large balance sheet that includes more than $2 trillion worth of Treasury debt holdings.

Some analysts say the prospect of a slow path in raising rates reduces the risk of a big rise in Treasury yields, encouraging buyers into long-term Treasurys, which offer more attractive yields compared with government bonds in Germany, Japan and the U.K.

The two-year note auction drew 57.2% indirect bidding, a metric that measures demand from foreign investors. That is higher than the average of 46.6% for the past six auctions.

Despite the roaring stock and corporate bond markets this year, Treasury bond yields have fallen after a big rise during late 2016. In mid-March, it traded above 2.6%.

Bill Northey, chief investment officer at the private client group of U.S. Bank, said he still expects the 10-year Treasury yield to rise to somewhere between 2.75% and 3% by the end of this year.

Mr. Northey said he believes that the soft patch during the first quarter won't derail U.S. growth momentum. Mr. Northey added that he doesn't expect a recession to hit the U.S. economy over the next 18 to 24 months, which supports his case to favor stocks over bonds.

Write to Min Zeng at min.zeng@wsj.com

(END) Dow Jones Newswires

May 23, 2017 16:20 ET (20:20 GMT)