Treasury Market Tests Appetite for Yield With Another Auction

Investors in US Treasury debt are bracing for another auction, after sales of two- and five-year notes drew only middling demand — despite yields near the highest levels of the year.

Appetite for short-end debt on Monday failed to benefit from a rise in rates heading into the sales, a poor omen for the week’s final note auction of seven-year securities. Yields have jumped across the curve this year, with the benchmark 10-year Treasury now paying about 4.27%, 40 basis points more than at the end of 2023. The seven-year note is yielding 4.31%.

Rates have soared as Treasury investors contend with an erosion in expectations for how much the Federal Reserve will lower interest rates this year — a policy shift that would likely fuel a bond rally — and an onslaught of new corporate issuance that has given yield-seeking investors ample alternatives. Investment-grade companies sold more debt in the US this month than in any other February on record.

“Today’s seven-year tenor looks expensive compared to yesterday’s five-year tenor, hence I expect another tail at today’s auction,” said Althea Spinozzi, head of fixed income strategy at Saxo Bank, using industry parlance to describe a sale that’s allocated at a higher yield than indicated by pre-sale trading. “It seems that investors are increasing duration but are cherry-picking tenors across the curve.”

Traders have been moving to price only 75 basis points of US easing by year-end, in line with what Fed policymakers in December indicated is the likeliest outcome. However, even that amount of interest-rate cuts is in doubt, with some investors contemplating the possibility that additional rate increases will be needed.