High Yields Lure Buyers as US Sells $180 Billion of Treasuries

Demand for Treasuries is holding up as the US government floods the market with more than $180 billion of new debt this week, a testament to the appeal of high yields for shorter-term notes.

Investors absorbed a $70 billion sale of five-year Treasuries on Wednesday at a slightly higher-than-anticipated yield, following an even-stronger show of demand for the auction of two-year notes on Tuesday. The yield on the securities in the secondary market was little changed at 4.65% as the trading session kicked off in New York.

Another $44 billion of issuance is due on Thursday, with the sale of of seven-year notes. While appetite has been resilient, investors may be less receptive to buying longer-dated securities just days before the Treasury unveils its quarterly refunding announcement and the Federal Reserve meets.

“It is still an uncertain environment for adding duration despite the higher yield levels with nominal GDP running in the range of 5%,” said Gregory Faranello, head of US rates trading and strategy for AmeriVet Securities. “Ultimately, a changed narrative from the Fed, a pickup in volatility and increased funding needs from the Treasury lend itself to a trickier environment for auctions further out the curve.”

This week’s hefty slate of supply — the last of the current funding cycle — was expected to help determine whether this is a turning point for the market, which has weathered four straight weeks of losses. The rout briefly drove the two-year yield past the 5% mark, a level that some considered enticing to bond managers seeking to put money to work in short-dated maturities.