NEW YORK: US Treasury debt yields edged higher on Tuesday in choppy trading after falling the previous two sessions, but sentiment remained cautious with the continued drop in oil prices, suggesting inflation would remain subdued.
On Monday, investors had sought Treasuries as a safety play given the plunge in oil prices.
U.S. 30-year bond yields, which move inversely to prices, recovered a bit but remained below the key 3.0 percent level. Benchmark 10-year yields, on the other hand, drifted higher, while yields on shorter-term maturities such as two-year notes rose as well.
Analysts said the drop in oil prices has further flattened the U.S. Treasury yield curve, which involved selling the front end of the curve and buying the long end.
With the Federal Reserve expected to raise interest rates next week, investors continue to shun short-dated notes, pushing their yields higher. At the same time, investors have turned to long-term assets such as U.S. 10- and 30-year bonds, which tend to benefit when inflation remains benign.
"I think it's all about the commodity and risk-off story today," said Gennadiy Goldberg, interest rate strategist at TD Securities in New York.
Oil prices resumed their slide on Tuesday, with U.S. crude falling below $37 per barrel and Brent below $40 for the first time since early 2009 as a global glut intensifies.
"That's why we're getting the bull-flattening curve. I think investors for the most part look at oil and what it will do to the inflation forecast," Goldberg said.
A bull-flattener refers to a yield/rate environment in which long-term rates are decreasing faster than short-term rates.
In late morning trading, U.S. benchmark 10-year Treasury notes were down 4/32 on the day to yield 2.241 percent, up from Monday's 2.234 percent.
The 30-year bond fell 15/32 in price to yield 2.974 percent, up from 2.962 percent on Monday.
U.S. 2-year Treasury notes, meanwhile, were little changed in price, with a yield of 0.947 percent, up from 0.935 percent on Monday. On Thursday, two-year yields hit 0.994 percent, their highest since May 2010.
This afternoon, the U.S. government will sell $24 billion in three-year notes. Action Economics said the auction could be difficult due to expectations for the Fed to start tightening next week and "some uncertainty over the path of tightening down the road."
It should be noted though that last month's auction was poorly subscribed, due in part to concerns about Fed tightening.
The U.S. Treasury will also sell on Tuesday $14 billion in 52-week bills.
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