US yields hold steady ahead of 5-year note sale

Imaduddin December 26, 2018

NEW YORK: US Treasury yields were firm on Wednesday with 10-year yields hitting eight-month lows as safe-haven demand for US government debt stoked by the recent stock market rout was offset by moves to make room for this week’s Treasury supply.

Turmoil in Washington from a partial government shutdown that began Saturday and US President Donald Trump’s criticism of Federal Reserve Chairman Jerome Powell has pushed investors away from equities and other risky assets.

“They added uncertainties to a market that’s already jittery,” said Larry Milstein, head of government and agency trading at R.W. Pressprich & Co in New York.

Earlier Wednesday, benchmark 10-year Treasury yields fell to 2.720 percent, the lowest since April 2. At 9:36 a.m. (1436 GMT), it was marginally higher from late Monday at 2.760 percent.

The gap between two-year and 10-year yields grew to its widest in three weeks on bets the Fed might pause its 2019 rate-hike campaign earlier than previously thought in response to signs of slowing US economic growth and the sharp stock market losses.

The two-year yield was 2.579 percent, down 1 basis point from Monday. It touched 2.540 percent earlier Wednesday, the lowest since July 6.

The gap between two-year and 10-year yields expanded to 18.7 basis points, hovering at its widest in three weeks.

Wall Street opened higher on Wednesday, with the S&P 500 index was up 0.8 percent.

 

Trading volume was light with many European markets remaining closed after Christmas. US financial markets reopened after being shut for the holiday.

The sharp decline in US yields since November has reduced the appeal of Treasuries among investors, who expected yields to rise, stemming from the growing federal deficit after the massive tax cut a year ago.

On Monday, the Treasury sold $40 billion of two-year notes to soft demand with the bid-to-cover ratio posting its weakest reading in a decade.

“It was not a particularly good auction,” Milstein said.

The Treasury will auction $18 billion of two-year floating-rate notes at 11:30 a.m. EST (1630 GMT) and $41 billion of five-year Treasuries at 1 p.m. EST (1800 GMT).

In “when issue” activity, traders expected the latest five-year supply to sell at a yield of 2.6090 percent, which would be the lowest yield at a five-year auction since January, Tradeweb data showed.

Copyright Reuters, 2018
 

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