Highest Treasury Yields of Year Fail to Tempt Buyers to Auction

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(Bloomberg) — Bond investors who were in the habit of treating every tick higher in Treasury yields as a buying opportunity are having second thoughts.

A sale of 30-year bonds garnered lackluster demand Thursday despite offering one of the highest auction yields of the past decade. While the results were far better than for Wednesday’s 10-year note auction, they suggest investors are chastened by the past week’s punishing selloff.

Several economic data releases including a robust employment report and sticky consumer price inflation for March have decimated expectations for Federal Reserve interest-rate cuts that would benefit the bond market, calling into question whether last year’s yield peaks can be exceeded.

“The bond market is worried that three times makes a trend,” George Catrambone, head of fixed income at DWS Americas, said of the consumer price index readings, which were higher than anticipated for a third straight month.

Further economic resiliency that delays Fed rate cuts is seen as paving the way for a re-test of October’s 10- and 30-year yield highs above 5%. The 4.5% level for 10-year yields — which ended last year under 4% — was anticipated to unleash a wave of buying that has yet to materialize. The 10-year rate has remained above the threshold since exceeding it on Wednesday.

“The current fragility in the bond market is a little bit of an October redux,” when the prospect of indefinitely elevated Fed rates focused investor attention on other bond-market negatives such as growth in supply, Catrambone said. 

The 30-year bond was awarded at 4.671%, a basis points higher than its yield in pre-auction trading at 1 p.m. New York time, the bidding deadline, a sign that demand fell short of expectations. Wednesday’s 10-year note auction drew a yield more than three basis points higher than indicated. 

Stalling progress by inflation toward the Fed’s 2% target rate has caused a sea change in expectations for monetary policy since January, when six quarter-point cuts were expected this year. The two-year Treasury yield briefly topped 5% Thursday for the first time since November as traders expect only 40 basis points of Fed easing this year. 

Also Thursday, more Wall Street banks scrapped forecasts for additional rate cuts this year, with economists at Deutsche Bank AG and Bank of America Corp. calling for just one, in December. 

The rise in yields across the market leaves investors with a loss of nearly 2% for March and a slide of 2.8% on the year, according to a Bloomberg index.  

“The question being asked by investors is how long does the Fed need to stay on hold and when and if the Fed does cut,” said Catrambone.

More stories like this are available on bloomberg.com

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Published: 12 Apr 2024, 12:14 AM IST

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