Supply, inflation worry lift US 10-year yield to 4-year highs

NEW YORK: US bond prices fell on Monday, with the 10-year yield hitting its highest in over four years amid worries about the growing supply of government debt and accelerating inflation as oil and commodity prices climb.

Last week, speculators reloaded their bets that 10-year Treasury prices will fall to near their highest levels in about 13 months, Commodity Futures Trading Commission's commitments of traders data released on Friday showed.

The US Treasury Department will sell a combined $96 billion in coupon-bearing securities this week, starting with $32 billion in two-year notes on Tuesday.

The yield on 10-year Treasury notes was 2.971 percent, up 2 basis points from late on Friday. It touched 2.998 percent earlier Monday, which was the highest since January 2014, Reuters data showed.

"There are supply concerns. The auction sizes are getting bigger," said Larry Milstein, head of agency and government trading at R.W. Pressprich & Co in New York.

The Treasury has ramped up its borrowing to fund its operation following last year's massive tax overhaul and a two-year budget agreement reached in February.

An expected jump in Treasuries supply is expected to lift long-term borrowing costs, not only for the government but also for consumers.

The two-year yield was 2.474 percent, nearly 2 basis points higher on the day after hitting 2.478 percent earlier Monday, which was last seen in September 2008.

A further sell-off in Treasuries steepened the yield curve from its flattest levels in over a decade set last week.

The flattening move partly reflected some anxiety among traders on whether the US economic expansion is running out of steam as expectations of more increases in short-term interest rates by the Federal Reserve might slow business and consumer spending and investment.

Some fund managers expect the curve flattening trend to resume even if yields rise further.

"The reversal is pretty minor so far. The (flattening) theme is still intact, but that doesn't mean long-end yields can't go up," said Gene Tannuzzo, senior portfolio manager at Columbia Threadneedle Investments in Minneapolis.

Meanwhile, some market gauges of US long-term inflation expectations hit their highest level in at least 3-1/2 years on Monday, Reuters data showed.

The 10-year inflation breakeven rate, or the yield gap between 10-year Treasury Inflation Protected Securities and regular 10-year Treasuries, was 2.19 percent, touching its highest level since August 2014.

Last week, global oil prices climbed to their highest levels since November 2014 on supply and geopolitical worries, boosting inflation expectations around the world, analysts said. On Monday, US crude futures settled up 24 cents at $68.64 a barrel.

The Federal Reserve's Beige Book of regional economic conditions, released on Wednesday, showed domestic prices grew across the United States in March through early April.