U.S. Treasury yields rose on Wednesday following weak demand for a $42 billion sale of 10-year notes and a surge in corporate debt issuance as risk appetite improved.
This week, the focus is on supply as traders await fresh economic data for more insights into the U.S. economy’s strength.
Yields had fallen to over one-year lows after July’s employment report showed an unexpected rise in the unemployment rate and lower-than-expected job gains, raising recession fears.
Stock market declines, partly attributed to traders unwinding popular dollar/yen carry trades (selling the Japanese currency and buying U.S. assets), had driven demand for safe-haven U.S. debt. However, as stocks rebounded, this demand waned, leading to lower interest in Wednesday’s debt auction.
The 10-year notes were sold at a high yield of 3.96%, 3 basis points above their pre-auction trading level. Demand was 2.32 times the available debt, the weakest since December 2022.
“Investors just weren’t willing to pay up for sub-4% 10s,” said Vail Hartman, U.S. rates strategist at BMO Capital Markets. “This suggests this move may still have a little bit further to run before dip buyers reemerge in a more meaningful way.”
Heavy corporate debt issuance also contributed to rising yields.
“There are a lot of issuers who paused earlier in the week and are now coming to market,” said Michael Lorizio, senior fixed income trader at Manulife Investment Management.
Yields on two-year notes, sensitive to interest rate changes, rose 1.8 basis points to 4.0034%, after dipping to 3.654% on Monday, the lowest since April 2023. Benchmark 10-year note yields increased by 8 basis points to 3.968%, after reaching 3.667% on Monday, the lowest since June 2023.
The yield curve between two- and 10-year Treasury notes steepened by 4 basis points to minus 4 basis points. It had briefly turned positive on Monday, the first time since July 2022.
Traders anticipate the Federal Reserve will cut interest rates by 50 basis points at its next policy meeting on September 17-18 due to a slowing economy, with a 31% chance of a smaller 25 basis point reduction, according to CME Group’s FedWatch Tool.
The likelihood of an emergency rate cut before the September meeting has decreased as risk markets recover.
The next major U.S. economic report will be July’s consumer price inflation on August 14. Additionally, comments by Fed Chair Jerome Powell at the Jackson Hole Economic Policy Symposium on August 22-24 may offer further insights into the direction of rate cuts.
Rising geopolitical tensions in the Middle East could also drive increased demand for U.S. Treasuries.
